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The domestic U.S. market is not likely to see much new airline capacity in 2008; in fact, a reduction in available seats is probable at certain airlines, on certain routes and perhaps even systemwide. Should demand hold up, and passenger traffic continue its upward trend, the result may be another year of more crowded airplanes and potentially higher airfares--two developments that would further strain corporate travel programs.
Some major U.S. carriers already have announced plans to trim growth or scale back operations in 2008, owing to an anticipated economic slowdown and high fuel prices.
Domestic capacity has oscillated over the past few years. According to the U.S. Department of Transportation, available seat miles jumped 7 percent in 2004, inched upward by less than 1 percent in 2005, retreated by 1.5 percent in 2006 and increased nearly 2 percent during the first nine months of this year.
Looking ahead, Southwest Airlines CEO Gary Kelly said a weakening economy and rising energy costs "would inevitably affect passenger demand." As a result, Southwest chopped a few percentage points from its 2008 growth plan, which now calls for a four percent to five percent increase in available seat miles.
United Airlines has said its 2008 mainline domestic capacity would decrease by 3 percent to 4 percent. Delta Air Lines said its reduction would be 4 percent to 5 percent, anticipating "a slight softening of demand for domestic travel from earlier expectations." Continental Airlines said 2008 domestic mainline capacity would be "down slightly."
The Air Transport Association's chief economist John Heimlichtold Management.travelthat his 2008 industry forecast assumes overall domestic capacity "would be flat to down 0.5 percent, year-over-year."
Domestic capacity cuts have been driven partly by expectations for weaker overall demand. "Gross domestic product has been empirically shown as the sole, reliable determinant of air travel demand," wrote JPMorgan Securities analyst Jamie Baker in a recent research note. "As such, we're hard-pressed to find anyone that could logically argue for anything but softer air travel trends in 2008 versus 2007."
Predictions on corporate travel demand in particular, however, are mixed.
Trade associations and travel management companies in recent months issued reports forecasting a continuation in 2008 of the high-demand environmentcharacterizing the past few years, with their constituents and corporate clients expecting larger annual business travel volumes. ATA's Heimlich said he is "not as concerned as other sectors may be" about corporate travel demand, suggesting it wouldn't deteriorate to the same degree as the overall economy, and would be boosted by more international travel.
However, Baker said "prudent corporate travel managers" would hone in on the increasing cost of international travel, contributing to the industry's risk of "2008 corporate travel curtailment."
International Air Transport Association director general Giovanni Bisignani in a speech this month said that the industry's "challenges in 2008 will be more difficult. Revenues will come under pressure with yields dropping 3.5 percent in real terms. This ... partly reflects the anticipated impact of the credit crunch on corporate travel budgets."
Depending on overall traffic volumes, capacity cuts may have ramifications for travelers. Heimlich said eliminating routes is a carrier's least preferred option, with smaller planes and fewer frequencies more likely measures.
Fewer frequencies would help alleviate airport and airspace congestion now plaguing the industry, especially in the New York area. Though such relief depends on which services carriers cut, an overall net reduction in flights should help federal officials implement measures to deal with chronic delays.
But smaller planes likely would mean more crowded flights and more frustrated travelers, especially when coupled with any growth in passenger traffic volumes. According to DOT, domestic system load factors increased year-over-year in 2004, 2005 and 2006, and during the first nine months of this year. Nowadays, airplanes on average fly at more than 80 percent full.
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