Higher Airfares, More Restrictions Offset Slowing Corp. Travel, Carriers Claim

The top brass at major domestic airlines during second-quarter earnings calls in the past week acknowledged a slight slowdown in business travel traffic, but many noted that growing yield, declining capacity and new fences built around business fares are lifting revenue to offset any traffic deterioration.

Northwest Airlines today was the last of the legacies—all of which posted losses for the second quarter—to chime in, as CEO Doug Steenland said corporate travel volumes are down slightly, but higher average fares are helping to offset revenue lost due to declines in traffic. He said capacity reductions—which the legacy carriers resoundingly will deploy in the second half of the year—should help shed lower-yielding traffic and drive up average fares.

Delta Air Lines president Ed Bastian last week said that although international fares are up, demand from the United States is "down slightly," while demand from international markets into the United States remains strong. Bastian, like other airline executives, said domestic business travelers "seem to be showing more price sensitivity with a shift of booking further out to take advantage of lower fares."

A few carriers noted that fare growth, which most expect to continue this year as more capacity comes out, is in part contributing to companies cutting back the number of trips, if not their corporate travel budgets. United Airlines executive vice president and chief operating officer John Tague said, "We're clearly seeing business travelers change behavior and book earlier. We have seen a modest decline from that perspective. We continue to believe that we have the right level of capacity now and for the time being our fourth-quarter capacity plans were addressed with this trend in mind."

Tague said United is "sizing the system around that most profitable core customer base, and it's inevitable that we're going to see changes. As I was driving to work this morning, I heard that even if you're working for some of the investment banks you're not going to be able to fly in first class—I thought that was a significant change. Our capacity plans assume that's going to occur. The elasticity for this market is less than the rest of the market, but nevertheless it exists. We're going to size the market around that."

Continental Airlines president Jeff Smisek said companies are encouraging further advance purchases as well as greater compliance with preferred carriers—in some cases enforcing pre-trip approvals and shifting bookings from business class to economy. Smisek said such moves are "pretty typical behavior in a weaker economic condition."

"While it's good news that we aren't hearing of travel budget decreases for the most part, we also aren't hearing of many companies increasing their travel budgets to compensate for higher fares," Smisek said. "The number of trips taken will have to decrease if companies are to stay within their travel budgets."

American Airlines executive vice president of planning and CFO Tom Horton said of corporate travel pullbacks, "Time will tell as to what the actual reductions are. We're hearing that companies are being more cautious and more closely scrutinizing their travel and we've actually seen that business traffic has been down a bit year-over-year, but pretty modest reductions thus far."

Several airline CEOs said the wealth of capacity coming out of the domestic system in the second half of the year should help stabilize the revenue equilibrium with higher fares and slower traffic. "As prices go up there is elasticity, so it will be less demand and that again underscores the need for capacity reduction," American's Horton said.

Several carriers noted that further fare restrictions, including minimum-stay requirements and Saturday-night stays, fence business travelers into higher fares. Regarding growth in advance booking policies and growing fare fences, US Airways president Scott Kirby said, "It's hard for businesses to manage far in advance business travel. It's a good idea to try, but it's hard to actually implement, because you just don't have enough certainty in terms of your schedule. If anything, it's getting harder to do because there are more and more fences in terms of the pricing structure and minimum stays, and that makes it more challenging." Other carriers, including United and Continental, also noted an increase in fare restrictions.

Though most carriers said the second quarter brought modest declines in business travel, Continental CEO Larry Kellner said that the post-Labor Day travel season could prove a greater test of business travel demand, as the current environment has made it "difficult to know if this is a false alarm or a real alarm." US Airways' Kirby said that when there is economic uncertainty, "travel is one of the first things that gets cut." However, Kirby added a positive postscript: "It also comes back pretty quick."