The average corporate airfare this year is poised to exceed pre-recession highs as airline capacity remains constrained despite surging demand and carriers raise prices to keep up with rising fuel costs. Airlines also are becoming more rigid on corporate discounts while non-negotiable fees and taxes account for an increasingly larger portion of corporate air costs.
Airfares are rising at a faster pace than previously expected. BCD Travel's Advito consulting arm in February revised upward its 2011 base fare forecast and now expects average year-over-year increases between 6 percent and 9 percent. Fuel costs were the chief driver.
"If oil goes above $100 [per barrel], we could be seeing double-digit increases," said Advito vice president Bob Brindley. "If it goes above $120, we could be seeing 20 percent-plus increases," which could start impacting demand.
Carlson Wagonlit Travel in a January report estimated 2011 airfares would increase between 2 percent and 7 percent year over year, depending on the route and booking class. The travel management company previously predicted average price hikes of up to 5 percent for domestic economy, international economy and international business-class tickets.
Economics 101
In addition to jet fuel costs, renewed airline pricing power comes down to the fundamentals: supply and demand. On the supply side, the domestic U.S. airline industry by the fourth quarter of 2010 had shed 23 million seats compared to three years earlier, according to Hudson Securities analyst Dan McKenzie. "The reduction in inventory has finally allowed the industry to claw back some higher pricing," he told attendees during a December Global Business Travel Association event. Despite some gradual capacity restoration, industry supply, like fares, remains below pre-recession levels.
The international situation is similar. Capacity between the United States and Europe this quarter, for example, is up 13 percent year over year, but remains 5 percent below first-quarter 2008 levels, according to Hudson Securities.
[PULL_1]Capacity between the United States and the Asia-Pacific/Australia region is up nearly 8 percent this quarter versus a year earlier, but remains about 1 percent lower than first-quarter 2008 levels.
Capacity between the United States and Latin America is up about 1 percent year over year, but down 5 percent from first-quarter 2008, though McKenzie attributed much of that decline to the folding of Mexicana.
At the same time, demand has been soaring. ARC, the airline financial processing and settlement firm, in January reported that domestic air travel last year "returned to levels approaching those achieved prior to the financial crisis in 2008," increasing 7 percent from 2009.
That trend is expected to continue throughout 2011, particularly for high-yielding corporate demand. For example, 81 percent of 273 corporate travel buyers polled in November by Morgan Stanley indicated their corporate air bookings would grow this year. Sixty percent of respondents expected corporate travel budgets by the end of 2012 to surpass pre-recession peaks; a stronger-than-expected economic recovery could make that happen even sooner.
Many airline executives in January confirmed the trend. Claiming US Airways' fourth-quarter corporate demand grew 17 percent year over year and continued to improve in early 2011, president Scott Kirby said, "It feels like we've seen another step-function improvement in that business demand." He also pointed to anecdotal evidence of companies boosting attendance at meetings and "going back to the behavior they had in 2007 and 2008."
Delta Air Lines, meanwhile, "ended the year with overall corporate volumes in line with levels we saw in 2007 and 2008," said president Ed Bastian, adding that the carrier's most recent data showed corporate revenues were up 23 percent year over year.
[PULL_2]Based on its November survey of corporate travel buyers, Morgan Stanley found that "airlines are competing less aggressively using corporate discounts." Last year, according to the report, airlines began lowering many discounts from a range of 21 percent to 30 percent down to levels below 20 percent. Survey respondents expected corporate negotiated airfares to grow this year on average by mid-single-digit percentages.
For those able to steer share and drive business, negotiating opportunities still exist. "It really depends on the market; it depends on the situation," said Advito's Brindley. "In general, in competitive and highly competitive markets, we're still seeing a lot of willingness by the carriers to make sure that they have the best appropriate price for the client. In that sense, it's still a good negotiating environment. In dominant markets, there's less ability to drive a better discount. In general, because yields have been going up, there is more business into the types of tickets that carriers are willing to discount. From a corporate discount perspective, that helps offset some of the published prices increases. Clients that have gone through an RFP process in late 2010 and early 2011 are doing well."
Westinghouse Electric Co. global travel manager and travel buyer Dan Cooper agreed. "We've definitely seen the increase in base fares, which is going to impact our savings. However, in this round of negotiations we've seen some more flexibility than we've seen previously," he said, acknowledging that a growing Westinghouse program has more volume to offer airlines. "Also, our program has been managed a lot more closely in these past two years, so I think all of those things are considered. Because of that, we'"ve seen more flexibility on pricing from all the carriers."
Airline Consolidation Further Limits Corporate Leverage
Meanwhile, a flurry of airline mergers and joint ventures also has "enhanced market power" for airlines, according to the Morgan Stanley report.
The five largest U.S. carriers held around 50 percent of the domestic market in 2005, based on U.S. Department of Transportation traffic data, and now the top five hold nearly 68 percent market share, thanks in no small part to the Delta-Northwest and United-Continental mergers. That figure will surpass 70 percent should the pending Southwest-AirTran merger close in the first half of this year as the carriers expect.
On other shores, British Airways in January sealed its merger with Iberia, forming the International Airlines Group, which "has been deliberately structured so it can easily accommodate future growth through mergers and acquisitions," said chief executive Willie Walsh. Meanwhile, LAN and TAM are working to form a Latin American giant and China Eastern Airlines acquired Shanghai Airlines in February 2010.
Antitrust-immune joint ventures are having a similar effect, as they have become the preferred way carriers contract with many multinational corporations. Such joint ventures have spread beyond the North Atlantic--where three clusters of joint venture carriers dominate air services--to the Pacific, where airlines this year are implementing tight partnerships on routes between the United States and Japan.
CWT's recent report claimed that "managing the impact of airline mergers and new partnerships on preferred supplier programs" would be a "challenge," and suggested buyers "assess the travel program's dependency on individual carriers or partnerships and limit the number of preferred suppliers to achieve the best possible discounts."