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U.S. airlines, corporate travel distribution companies and analysts in the past few weeks have pointed to promising demand trends that suggest the beginning of a modest recovery in business traffic. Despite recuperating financial performances and billions in new financing secured during the past month, airlines are not rushing to restore capacity. Instead, with a watchful eye on volatile fuel prices, they continue to either cut or plan for very modest increases versus depressed 2009 levels.
"The airline industry is now more rational and won't add back capacity very rapidly, even with an economic upturn," according to Boyd Group International president Michael Boyd.
"Without the level of capacity discipline that we have led and most people in the industry have participated in, this would be a very, very dire time," said United Airlines president John Tague during a conference call this week with analysts and media. "So we're going to have to keep our lid on capacity going forward."
Tague was among the airline executives during the past week to discuss promising corporate travel trends. "Business and premium traffic are coming off the lows we saw earlier this year and we are seeing gradual improvements in our corporate portfolio performance," he said, noting that corporate revenue "now is down 25 percent versus over 40 percent earlier in the year."
Delta executives shared similar information, saying that corporate volumes currently are down about 10 percent year over year while corporate revenue currently is down 25 percent year over year, compared with a reduction as much as 50 percent earlier this year.
Incoming Continental Airlines CEO Jeff Smisek told analysts that "high-yield premium revenue" declined 31 percent in July, 28 percent in August and 21 percent in September. "There are a growing number of our corporate clients that tell us they are beginning to ease their most draconian travel restrictions, and some are even permitting travel for internal meetings again," he said.
Wall Street analysts and executives at major business travel distributors also said they are tracking noticeably improving corporate travel volumes. In a research note issued this week, J.P. Morgan Securities wrote that "demand trends--corporate in particular--are gradually starting to accelerate." UBS analysts in their note this week said, "We are expecting and modeling a stronger corporate recovery as new travel budgets kick in next year."
"October feels like it started on an upward trajectory," one executive at a significant corporate travel distribution provider told The Beat, "but we're all being very cautious in how we see that."
The largest U.S. airline, Delta, said its total fourth-quarter capacity would be down as much as 11 percent, with international capacity down as much as 16 percent. For 2010, system capacity is expected to decline approximately 3 percent compared to 2009.
At American Airlines, fourth-quarter capacity will be down about 6 percent year over year and 16.5 percent versus the fourth quarter of 2007. "Time may prove that to be insufficient, but it is too early to make that judgment," said CFO Tom Horton. The 2010 plan calls for a full-year capacity increase of about 1 percent versus this year.
"We have gotten rid of hubs and legacy flying that just don’t work in this environment," added AA CEO Gerard Arpey. "Perhaps more will need to be done."
United said consolidated capacity in the fourth quarter would be down 3.2 percent to 4.2 percent, and down 7.5 percent to 8 percent for full-year 2009. For 2010, the carrier expects mainline capacity to be down 0.5 percent to 1.5 percent year over year and consolidated capacity to fall between a 0.5 percent reduction and 0.5 percent increase year over year.
Continental expects its consolidated fourth-quarter capacity to be down 0.8 percent, including a modest increase in the domestic market and a 2 percent cut in international markets. For full-year 2010, "Continental expects its consolidated capacity to be up 1.5 percent to 2.5 percent year over year," according to an investor update.
At Southwest Airlines, fourth-quarter capacity will be down about 8 percent year over year, and "first-quarter  capacity is definitely going to be down compared to first quarter of ’09," said CEO Gary Kelly. "We’ve gotten more and more aggressive with each schedule in terms of pruning. If we add some flights that we evaluate and we don’t like them, we’ll pull them out.
"The main thing we’ve been able to do is trim out flights at the beginning and the end of the day that aren’t heavily utilized and also go into the meat of the day, where we have plenty of frequencies, and trim out one here and there," Kelly continued, referring to a net 10 percent decline in total flights during the past year. "For the most part, we’ve been able to keep those customers we were serving before and just spread them over fewer flights and with little negative customer reaction. We have found cases where we’ve cut a little bit too deep, and customers have said, 'We need that 5:00 p.m. flight,' and we are certainly reacting to that. But I would say that that’s more a tactical adjustment than a strategic change in our schedule."
Matching Supply With Demand, Watching Fuel
Airlines will continue to closely monitor demand and fuel prices and adjust operations accordingly. "Fuel is moving with such huge volatility," said Barclays Capital analyst Gary Chase during the United conference call. "Obviously, capacity is something you're going to have to evaluate every month."
"The industry does need to be more flexible as a result of being exposed to a higher degree of volatility," agreed United CFO Kathryn Mikells.
"Our capacity planning remains real time," said AA CEO Gerard Arpey. "We'll be watching very carefully the trends in demand and corporate traffic and tracking GDP."
"The next big signal we are looking for is how corporate travel budgets get reset for 2010," said Tague. "If we don’t see a continued steep improvement as we move through the next quarter or two, then we are clearly going to have to reassess."
Meanwhile, Tague noted that "in general, over the last six to eight weeks, we've seen more positive momentum and traction" related to raising airfares.
"We believe the industry can support higher prices, and you can expect us, particularly in the face of higher fuel prices, to raise our ticket prices," said AA's Arpey. "Our first priority is to continue to raise prices."
Southwest, too, now has "more confidence in pushing through some very modest fare increases" given favorable traffic trends, according to CFO Laura Wright.
"Southwest will have little choice but to aggressively seek higher yields next year," according to a research note from J.P. Morgan Securities analysts. "Southwest can ill afford to play the spoiler role from an industry pricing perspective--a net benefit for its competitors."
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