Airlines Fight For Footing: Traffic, Revenue Declines Outweigh Business Demand Gains

Planes during the second quarter were about as full as they were a year ago, a few fare hikes succeeded in recent weeks, and business traffic and revenue began to build as the quarter wore on. Quick to quell optimism, however, airline executives during second-quarter earnings calls in July said that low-yield leisure passengers and lower capacity propped up load factors, tickets remained deeply discounted and business traffic and revenue lagged significantly behind where they were a year ago.

Echoing trends discussed by other airlines, American Airlines CFO Tom Horton said the carrier's more than 20 percent decline in revenue during the second quarter was largely driven by "weakness in business travel revenue, which was down more than system average revenue."

The Air Transport Association reported June passenger revenue for the largest U.S. airlines fell 26 percent, compared with June 2008—marking the eighth consecutive month of year-over-year declines. That the number of passengers is down only 6.5 percent indicates the absence of high-yielding business passengers.

Giving more detail on business-specific revenue and traffic than its peers, Continental Airlines president Jeff Smisek said business passenger traffic was down 27 percent in June compared with the same period last year. Though more than one-quarter of valuable customers were absent from Continental's planes the last month of the second quarter, Smisek said "we do think the drop off in business travel has stabilized" since June figures represent an improvement from April, when the carrier saw a 36 percent annual decline in business passengers.

"The year-over-year drop in business revenue in June was slightly better than what we saw in April and May, although it is still significantly down," Smisek said.

Though revenues remain in deep decline in year-over-year comparisons, some carriers said business traffic increased modestly month-over-month in the second quarter.

Delta Air Lines CEO Richard Anderson said the carrier in the past few months had seen a modest increase both in business traffic and revenue.

"We have seen stabilization in business demand and candidly have seen a bit of an uptick, but I think it's very early to call that fact a trend," Anderson said.

American's Horton said, "I would say corporate travel has been off more than system traffic and system revenue, but it seems to have leveled off after the very sharp declines we saw at the end of '08 and the beginning of this year."

Horton said business travel revenue "remains sharply lower, year over year, but it does seem to have leveled off a bit here in the May and June period."

June ARC data show the number of agency transactions declined by less than 3 percent compared with June 2008. That number represents the narrowest annual decline for any month this year.

"In terms of the overall nationwide travel agency activity, the closing of the gaps is coming from the vacation side," said ARC vice president of marketing, sales and customer care Mike Premo.

That is evident in ARC June sales figures, down 20 percent from a year ago, he said, adding that "cheaper fares are driving the leisure transactions" as low-yield leisure passengers are "filling in for the business travelers that aren't there."

Now, carriers are aiming sights on the post-Labor Day period when summer leisure demand drops, leaving business traffic to lead any recovery in the airline business.

Looking toward the fall, Continental's Smisek said, "Some carriers have already announced deeply discounted fare sales for targeted periods of weakness in the fall in an attempt to fill seats that have historically been filled with business traffic. Unless we see a rebound in business traffic, we expect that this trend will continue."

Despite limited pricing power for airlines, FareCompare.com CEO Rick Seaney in mid-July recorded the third domestic airfare hike within six weeks, which he said showed signs of a thaw.

"U.S. domestic airlines have been searching for a bottom the past six months, and it appears this hike, along with a slowdown in domestic airfare sales, is the first sign that the bottom could be near this quarter," he said.

Southwest CFO Laura Wright said, "While we have had some success with fare increases since April, heavy discounting has been necessary to stimulate the traffic due to the sharp falloff in business travel."

Like other carriers, president and COO John Tague said United Airlines has grown cautious in its outlook. "We've not talked in the last few quarters about an imminent improvement, and we don't have any basis to do that now," he said.

Noting that airlines "saw the spigot turned off" in January, the impact of what he called "a managed outcome as corporations sought to reduce their expenses," Tague said, "We are a variable expense. It's very easy for some period of time to reduce it substantially. I think that we would argue that, as the economy improves and people seek to build their business back up again, they'll see our product as an essential component of doing that."

Delta also is playing the rest of this year conservatively, and as the carrier plans capacity and other initiatives, executives "are assuming no recovery" in 2009.

"We don't see any deterioration in the trends, but we don't at the same time see it picking back up, particularly on the business corporate travel side," Delta's Anderson said. Still, like other carriers, Delta is holding out for the fall period to "get a better view of what some of the macroeconomic indicators will be September through December, before we want to make any adjustments."

Wearing both airline analyst and corporate traveler hats, JP Morgan analyst Jamie Baker in an exchange with United CEO Glenn Tilton during the carrier's earnings call in July said, "The longer the downturn continues, the more accustomed to not traveling certain business travelers will become. I realize I'm not the best example of that, but we've been flying a lot less at JP Morgan and, quite frankly, I kind of like it. I'm just worried that others are going to get used to that, and it will be a much more gradual recovery than I think what people are hoping for."