Airlines Report Losses, Predict Reduced Business Travel

American, Continental and Delta reported quarterly operating losses yesterday and today and are bracing themselves for a downward spiral in corporate travel activity, though the net effect of the financial crisis on business travel remains to be seen.

Continental Airlines president and COO Jeff Smisek today during the carrier's earnings call said, "We don't have a lot of data yet and we're not sure of the magnitude or duration of the effects. However, it's clear there will be an overall negative effect on corporate travel, although our early indications show the effect will vary by industry and by region."

Citing a recent survey of its corporate clients, Smisek said, "Obviously the financial firms in New York City are feeling the biggest effect, with all of them indicating a significant reduction in travel spend for the remainder of the year and a sizable expected reduction in their 2009 budget."

Houston-based Continental said energy companies "continue their travel spend," emboldened by oil prices Smisek called "still pretty high compared to historical prices." However, the battered automotive industry is showing a "significant downturn in traffic," Smisek said. He also noted that customers in the pharmaceutical industry "will be budgeting for travel at slightly lower levels for 2009, although a lot depends on product launches, which can cause a spike in travel."

In addition to budget cuts and weakened travel levels, Smisek said Continental continues to see "typical behavior among most of our corporate customers in response to weaker economic conditions." Those include advance purchase requirements, greater use of lower-cost restricted fares, policies that encourage travelers to trade down from business class to coach and more stringent travel approval processes.

American Airlines CFO Tom Horton yesterday said the carrier has witnessed "softening demand with a fourth-quarter booked load factor of about two points lower versus last year with domestic down about one point and international down about 4.5 points."

In response to an analyst's questions on corporate-specific demand, Horton said the carrier—like others—still is reading the tea leaves, though early indicators are mixed.

"We have seen a little bit lower corporate travel," Horton said. "That's down a few percent in the month of September, though it's down less than it was in August. We saw a pretty good downdraft in corporate travel in August. It's really a little too early for us to have a good look at that because it tends to be late bookings."

American, like other carriers, said the New York market—the epicenter of the spreading financial distress—has been hardest hit. "We have seen that with the turmoil in the financial markets, the demand out of New York is softening more than other parts of our domestic system," Horton said. "As we look at our advanced booked load factors out of New York, it's weaker than the rest of the system."

Continental said it is somewhat insulated from demand weakness out of New York. Smisek said, "We've never before been a player among the financial firms in the New York-London Heathrow market, as we didn't have Heathrow access, so we don't expect to be as adversely affected as those carriers with more dependence on Heathrow traffic."

Smisek even saw an opportunity, noting that "now that we're building a reasonably competitive schedule between New York and Heathrow, we have an opportunity to compete for global corporate contracts that we were shut out of earlier, so we have an ability to take share from our competitors."

Delta Air Lines executive vice president of network planning and revenue management Glen Hauenstein spoke less specifically about the impact, but noted "most of the corporate clients right now are seeming very cautious. We had some clamping down in the fourth quarter, but the capacity reductions we have taken to date have more than offset that."

Like Hauenstein, the industry is waiting to see if the decline in demand adequately matches new capacity levels, leaving carriers whole with pricing power. Meanwhile, they are waiting to see if the recent fall in fuel costs will be sustained and whether they offer a silver lining to a weakened revenue outlook.

JPMorgan airline analyst Jamie Baker in a research note said that third-quarter jet fuel averaged more than $1 per gallon more than spot prices this week. During the third quarter, "the industry hadn't undertaken unprecedented capacity cuts, and demand had yet to reflect the most recent global malaise. As such, we broadly consider 3Q industry results to be irrelevant, offering little to no insight as to the industry's 2009 profit potential."

UPDATE: A previous version of this story reported American, Continental and Delta reported losses in the third quarter. It should have read the three carriers reported operating losses, as American’s parent AMR reported a net profit of $45 million on a one-time special item, the sale of American Beacon Advisors, its asset-management subsidiary.