Airline Seller's Market Losing Steam?

<B> Airline Seller's Market Losing Steam?</B>
<I>Wall Street, Others Predict New Deal-Making Opportunities in '99</I>

By Jay Campbell

As corporate travel managers begin to focus on 1999, some airline observers are anticipating a year in which the industry seller's market loses some steam and offers up new negotiating opportunities.

Although the overall picture is not yet clear, some industry sources expect the airlines to begin looking more strenuously toward Corporate America for help on high-yield business, as average yield continues to drop due to the increased use of lower, more restrictive fares.

That trend during the past few months has made Wall Street analysts and investors and airline management a bit nervous, despite continued low costs, healthy demand and, thus far, relatively low capacity growth.

"There is pressure on yield," said Merrill Lynch airline analyst Candace Browning in New York. "I wouldn't expect the kind of fare increases on the business side this year that we saw in 1996-97. In terms of corporate negotiations, we'll see a small shift where corporations will get a bit more negotiating strength, but that will vary by market."

Browning suspects that companies already are getting some breaks on travel to Asia, and the same will be true in Europe, although to a lesser extent, as airlines shift some capacity there from Asian destinations.

Gary Alexander, vice president of global supplier relations for Carlson Wagonlit in Minneapolis, agreed.

"Exit-U.S., there is weakness and some excellent opportunities where deals are getting richer, especially for those buyers who have learned to leverage outside the domestic market," he said. "The U.S. market is tight, but not impossible. We haven't seen domestic deals getting dramatically better, but that could change."

Kevin Iwamoto, airline and car travel supply manager for Hewlett-Packard in Palo Alto, Calif., already has heard from one airline seeking ways to make up for weak Asian business.

"I've been approached by my top airline looking for high-yield business," he said. "They're moving capacity from Asia to transcontinental and transatlantic."

Most of the dozen corporate travel managers that were interviewed by Business Travel News last week had not yet heard the same from preferred carriers, but all of them agreed that corporate control over travelers' choice of airline is getting the attention of suppliers.

Many travel buyers were optimistic about getting better deals this year, not because of some shift to a buyer's market, but rather because managed corporate travel programs have performed so well in their recent contracts.

Lisa Trenda, director of corporate travel services for United Healthcare in Minneapolis, is preparing for new airline contract negotiations this spring.

"I'm now more optimistic than I was last year, because we performed very well in our programs," she said. "And that came along with strongly encouraging connections and Saturday stays, even though carriers usually give you better discounts on the high-yield tickets."

Some travel managers believe that any movement from the strong seller's market is still some time off. "If anything, it'll be 2000 before we see a buyer's market, when the economy really gets soft," said Bill Patient, a travel buyer with Elf Atochen, based in Philadelphia.

"I think the marbles are still in the airlines' court," said Armand LeCompte, director of aviation and travel services for Hoescht Corp. in Bridgewater, N.J. "Load factors are still really high and negotiations are tough. The name of the game is still moving share."

But there are some signs of change. Susan Donofrio, an airline analyst with BT Alex Brown in New York, said weak airline revenue trends beginning in the fourth quarter are leading to lower expectations for 1999 profitability.

"We are forecasting net income for the 10 majors to decline 23 percent for fourth quarter 1998, to $797 million from $1.0 billion a year ago. We are also lowering our 1999 estimates to reflect the likelihood that this revenue weakness will spill over into 1999, given current industry revenue trends coupled with the fact that system capacity growth for the 10 majors is expected to ramp up from a year-over-year increase of 3.9 percent in the first quarter of 1999 to 7.7 percent by third quarter 1999," Donofrio wrote in a message to clients. "This is indicative of a possible overcapacity situation for the majors."

Indeed, carriers here and around the world are taking steps to prevent overcapacity. Scandanavian Airlines System is the latest of many airlines--including American, British Airways, Northwest, United and just about every carrier in Asia--to adjust capacity downward for 1999.

According to the Air Transport Association, average domestic yield (the price a typical passenger pays to fly one mile) dropped 1.0 percent in September, 4.2 percent in October and 1.7 percent in November from the previous year.

Meanwhile, carriers also have benefited greatly from low fuel prices, though the savings were offset by the yield erosion in late fall, Merrill Lynch reported.

David Swierenga, chief economist for the Washington, D.C.-based Air Transport Association, said that yields can sometimes be held down when there are low fuel prices and, consequently, there is no pressure to raise fares as profit margins remain healthy.

"Our outlook for the year is slow economic growth with the potential for capacity outstripping demand," said Swierenga, emphasizing that although average yields may have been down in recent months, actual revenues were not."Bookings for the first quarter remain strong, though we'd like to see some yield improvements," said Continental Airlines chairman and CEO Gordon Bethune. "Some of the business mix declined late in the third quarter, but what we were seeing is just that they were using excursion fares."

That was the case at State Farm Insurance, based in Bloomington, Ill., where supervisor of air travel Dave Colee observed that over the last few months, "travelers have become more conscientious shoppers than they used to be." But even as they're buying lower fares, Colee said, there's no drop in demand.