Analysts Expect Airline Ticket Prices To Land Softly
<H1> Analysts Expect Airline Ticket Prices To Land Softly</H1>By Jay Campbell
Travel managers should find relief from this year's escalating airfares by 1997, but today's volatile pricing environment is preventing a consensus from forming on just how much the fare increases will slow.
While some analysts are predicting a year-over-year increase of 2 to 5 percent, others question whether it would be wise for the airlines to push fares much past this year's decade-topping levels. They might, in fact, be forced to lower them.
"The balloon is as big as it will get without popping," said Terry Trippler, editor of Minneapolis-based <I>Airfare Report</I>. "We could look back on Labor Day 1996 as the peak, and then I think we'll see a dramatic drop in business airfares next year, perhaps by as much as 10 percent."
"Fares will reach the resistance point in the next six months," said Bob Harrell, an airfare consultant for American Express. "Clearly, the airlines are testing the limit."
Of course, the main factors that dictate airline pricing are supply and demand. On the supply side, the top 10 U.S. carriers have continued to check capacity growth at a low 2 percent over the first seven months of 1996. Even aircraft orders like the $900 million one placed by United last month have only moderately changed capacity forecasts.
On the demand side, however, there has been some uncertainty about the economy later this year and next. Analysts are still "assuming there will be no significant recession in the short term," said Furman Selz in an August report. The top 10 U.S. airlines' June load factor of 73 percent was the highest in more than 10 years, and the International Air Transport Association reported a first-half 1996 year-over-year increase in revenue passenger miles of 9 percent, compared with a 6 percent jump in available seat miles.
"The high load factor levels are a disincentive for carriers to lower prices," said the Air Transport Association's chief economist, David Swierenga. "But I do think the carriers will have to lower prices to be more in line with the 3 percent rate of inflation to maintain the traffic growth they've had. Overall, you'll see a slight increase."
Things may be looking even brighter internationally when European deregulation hits next April and competition among international alliances heats up. Some industry watchers are predicting that fares on major intra-Europe routes will drop by as much as one-third.
"The next big push for negotiated programs will be in international markets," said Valerie Estep, acting president of Topaz Enterprises. "By tying them in with domestic programs, travel managers may be able to take advantage of the increased competition worldwide." Estep said that over the past year, point-of-sale discounts have become more common in international negotiations, as opposed to the traditional back-end or soft-dollar discounts.
On the domestic front, meanwhile, travel managers and agents should watch for the occasional deal and continue to closely monitor travel patterns for compliance.
"The airlines are more active in fooling with pricing when they're making money, and that sometimes gives the business traveler a break," said Rolfe Shellenberger, senior consultant for Runzheimer International in Rochester, Wis. "Two years ago, you'd never find a 14-day advance purchase for a one-way fare. Now they're all over the place."
Both internationally and domestically, low-cost carriers will continue to keep downward pressure on fares through next year and beyond, especially as the number of markets they serve continues to grow. Southwest already is pushing down fares in the Providence, R.I., market-even before its October start-up-and Delta Express, JetTrain and others will be entering northeastern cities this fall (<I>BTN</I>, Aug. 19).
"I'm finding fewer and fewer markets where high fares haven't been forced down by low-cost competition," <I>Airfare Report</I>'s Trippler said. "And the Northeast is getting flooded with low-cost carriers."
Additional factors that are less predictable but could be equally important in impacting next year's airfares are fuel costs, new security measures and questions as to how long the ticket tax (see story, Page 1) will remain in effect. Fuel prices have eased off after nearly a year-long rise and an April peak of 65 cents per gallon, the highest since 1992. Still, "it's anybody's guess as to what will happen this winter," Harrell said. "A lot of it depends on the weather."
In addition, what the government might do to tighten security is unknown, but any moves could affect aircraft turnaround times and labor expenditures. The ticket tax, in effect through Dec. 31, could bring the air travel industry back to square one if there is another congressional stalemate.
Perhaps it is such unpredictable elements in the airline industry that cause the carriers to do what they're doing now: "take advantage of demand to see how far they can go with fares," Trippler said.
According to Shellenberger, "in the airline business, as opposed to the hotel business, for example, a competitor can be there tomorrow. So the carriers are always waiting for something to happen which will spell impending doom."
Doom is what the industry got in the early 1990s, and that's when fares were lowest. But that also meant service was cut back and travelers were unhappy. Hopefully, after the current fare-hike frenzy settles, the airlines will manage to remain profitable without being jam-packed and understaffed.