Airlines Keeping Deepest Discounts Away From Corp. Travelers

Without a successful round of fare increases since July 2, U.S. airlines are keeping the most deeply discounted leisure tickets out of business travelers' hands through Saturday-night stay and other restrictions. Meanwhile, a new study predicts competitive pressure will prevent significant fare hikes as long as airline costs remain low.

An International Air Transport Association report released this month forecasts declines in airline traffic and revenue this year. Perhaps more telling for the fare outlook, the report shows a direct correlation between airline unit costs and yields, a per-unit measure of fares. "Since deregulation in the late 1970s, yields follow unit costs almost exactly," the IATA report noted, adding, "This is consistent with other evidence that the airline industry is highly competitive and unable to sustain fares significantly above unit costs."

That historical evidence bodes well for travel buyers seeking lower fares, as airline unit costs have been reduced greatly by the oil price freefall from record highs in mid-2008. IATA concluded that yields grew sharply "because of fuel prices. During 2009, unit costs will fall sharply because of the fall of oil and jet fuel prices. Yields are likely to decline as a result."

Rick Seaney, CEO of fare tracking firm FareCompare.com, said the theory of fare trends mimicking costs jibes with the systemwide fare increase timeline from last year. "It almost corresponds to when oil hit $147 a barrel. That was the last day of fare hikes, and it started its downfall at that point," Seaney said.

FareCompare recorded 22 attempts initiated by domestic carriers to hike systemwide airfares or fuel surcharges in 2008—with 15 of those efforts successfully matched by all six legacy carriers across at least two-thirds of their networks. A FareCompare timeline, however, shows that as the year progressed, efforts to initiate broad fare hikes and fuel surcharges waned. An unsuccessful attempt in August was the last time domestic carriers tried to implement a broad fare increase.

Shortly thereafter, when demand began to outstrip fuel- cost concerns, the fare sales began, Seaney said. Though he noted the number of fare sales in the first half of January this year are similar to those in the same period in 2008, the discounts are deeper and the applicable travel periods are longer.

Even though corporate travel buyers increasingly prescribe lowest-logical-airfare policies and advance-purchase requirements—making it increasingly likely corporate travelers take advantage of deeply discounted published fares—airlines have continued to construct walls around the more attractively priced fares in efforts to steer business travelers to higher fares.

"The business fares are five times greater than the leisure," said Bob Harrell, who heads airfare consultancy Harrell Associates. "This ratio is back up from where it was a year ago."

Citing growing minimum-stay requirements as a key example, Harrell noted, "There's lots of fences around these fares that are designed to keep the business traveler from using them."

The disparity between business fares and leisure fares is evidenced in Harrell Associates data pulled in mid-January. The Harrell 100 index shows the lowest average business fares—typically unrestricted, refundable fares without more than a three-day advance purchase requirement—were 3 percent higher than they were in the same period last year. Meanwhile, restriction-laden leisure fares averaged 7 percent lower than the same period last year and were one-fifth the price of business fares.

Though such fares are coveted due to their comparably low price, Seaney said, "Typically less than 20 percent, more often 10 percent, of the plane is flying on these special fares. If you're not flying on those, you're essentially buying airline tickets that are more expensive than they were in, say, 2007—anywhere from 15 percent to 25 percent higher. Then, if you throw in the total cost of the ticket, with baggage fees and everything else out there, it's much higher."