Business fares have been heading south for most of the year as major airlines try to stimulate business travel demand, but there is growing anticipation that corporate buyers will face higher airfares in 2004. As airlines adjust capacity levels and corporations increase travel volumes in an improving economy, many industry experts predict the nation's major airlines finally will rediscover a profitable pricing formula. Meanwhile, despite recent sales, leisure-oriented fares—increasingly popular with corporate travelers—also have been on the rise.
For now, however, business fares continue to decline. According to analysts from Deutsche Bank and Harrell Associates, the average business fare for the week of Oct. 13 dropped 5 percent year over year, similar to fare decreases observed for many consecutive weeks.
Delta Air Lines showed the biggest decline, down 20 percent overall. Business fares declined by double digits in 10 of its top 20 business markets, including 80 percent between New York and Salt Lake City—a market in which JetBlue Airways competes. Continental Airlines' business fares were down 64 percent between Newark and Seattle, a market in which ATA Airlines will begin service this weekend
(see story)."With over 600 domestic city pairs now capped at $299 one way for a last-minute ticket, it is increasingly difficult to drop $1,000 for domestic travel," said J.P. Morgan Securities Inc. analyst Jamie Baker in a recent research note. "With each successive low-cost carrier route, so goes the network carriers' last grasp on pricing power."
US Airways, however, according to Deutsche Bank, raised business fares 5 percent in the week of Oct. 13, compared with last year. America West Airlines was the only other major with higher year-over-year business fares, as its levels rose 1 percent.
Danny Hood, president of WorldTravel BTI, this summer at the National Business Travel Association conference in Dallas, suggested corporate clients in the years ahead will see major airline fares "that look like a low-cost carrier fare," when 30 percent discounts in net-net deals offset a 30 percent fare premium levied by the network carriers. "There is a premium that we all will pay to network carriers for global networks, gateways, alliances, marketshare deals, frequent flyer programs and tracking," he said.
Meanwhile, there have been recent moves by carriers to reverse the trend of generally declining airfares, including increases in leisure fares, that, according to Deutsche Bank, are up 15 percent on average versus last year. Overall, the Air Transport Association reported higher year-over-year domestic industry passenger yields in August, the second consecutive monthly increase. Also, the U.S. government this month reinstated the $2.50 per flight segment security tax that it temporarily suspended in June. Airlines did not raise published fares to offset the fees—up to $10 per roundtrip ticket—nor did they absorb them. Instead, they passed the fee on to passengers as a separate item in addition to the ticket price, effectively raising fares.
Continental, meanwhile, no longer will adjust downward the fares on connecting itineraries that generate more than $6 in government-imposed segment fees. The airline previously reduced the base fare on connecting itineraries to offset the segment fees and keep the price competitive versus nonstop operators in the same market. Continental also no longer will absorb the $4.50 passenger facility charge levied per departure for connecting flights through Cleveland Hopkins International Airport.
"The current depressed revenue environment and the continued fall in average fares paid in recent years dictates this change," the carrier said. "Customers will now see the full impact of taxation on their ticket purchases."
Industry groups, meanwhile, in recent weeks predicted potentially higher air transport costs for corporations as carriers continue a slow recovery and rebuild business fare levels. NBTA, for example, in its 2004 Business Travel Cost Forecast, said the coming year will show a slight recovery in corporate travel spending and business travel volumes
(see story). That, according to NBTA, will allow carriers to increase corporate airfares conservatively, while their still-tenuous financial footing minimizes risky price wars. Overall, the association predicted 2004 corporate air rates will rise 5 percent and that "businesses will stomach" that increase "as productivity rises and the investment in travel again becomes necessary."
Meanwhile, Eclipse Advisors last week predicted published domestic fares would fall next year by 2 percent to 3 percent, but suggested actual fares paid would rise as much as 7 percent. "The seats removed from the market will be concentrated in the lower, cheaper inventory buckets forcing up actual purchased fares," Eclipse said. "This trend will increase the need for corporate discounts."
Matthew Davis, director of American Express Global Consulting Services, suggested stronger demand "could spell bad news for business travelers who have grown accustomed to lower fares over the past two years. However, the proactive travel manager will have locked into better rates in preparation for 2004."
The American Express Global Business Travel Trends and Forecast for 2003-2004, issued this month, predicted U.S. economy class domestic fares would rise between 1 percent and 2 percent next year, while international business class fares would increase 2 percent to 3 percent. The latest figures from Amex's corporate travel indices show that in the second quarter of this year published short-haul economy fares for U.S. passengers fell 4.64 percent, year over year. Published international business class fares rose 5.54 percent, although most corporations will have mitigated these increases with negotiated deals.
In Europe, however, buyers even may be slightly disappointed by Amex's Davis heralding an average drop in short-haul economy of 2 percent to 3 percent. In the second quarter of this year, fares in this category dropped an astonishing 17.5 percent, reflecting the impact of mainstream airlines scrapping Saturday night restrictions to combat low-cost competition.
~Amon Cohen contributed to this article.