Options In The Air

<B>Options In The Air</B>

By David Jonas

Reeling from deteriorating revenue and traffic trends, the nation's major airlines are dangling incentives in front of travelers and corporate travel buyers, but overall business travel is not expected to rebound any time soon. For the airlines, fluttering red flags signal that the industry as a whole will post its first yearly loss in years. Armed with that knowledge, opportunistic buyers can approach challenged airlines and, given the right conditions and the ability to drive traffic, cash in with favorable corporate contracts.

Financial losses have been driven primarily by a decline in premium level bookings. The American Express Business Travel Monitor, which tracks various fare categories across 329 domestic city pairs, found that usage of first class fares by corporate customers in the first quarter was down to just 2 percent, a point lower than last year. Full coach fare usage fell 5 percent, to just 7 percent of the total. Amex said both figures were record lows.

Further, the Air Transport Association last week reported that industry unit revenues fell 11.8 percent; passenger yield was down nearly 7 percent.

UBS Warburg analyst Sam Buttrick said these numbers "represent the single largest monthly revenue decline in our records." Buttrick, in estimating a 15 percent decline in corporate revenue, further predicted that June unit revenues would be down between 8 percent and 9 percent. Based on his new downgraded earnings projections, Buttrick said the industry would post overall financial losses for the June quarter and full-year 2001, "the first such losses since 1994."

Meanwhile, in monthly reports detailing May operational performance, every major carrier except America West Airlines announced lower load factors, as capacity, for the most part, was above last year's levels. Though year-over-year comparisons with the past year's record-high load factors are difficult, it nonetheless means that many more seats are flying empty, a bad sign for an industry relying on strong leisure traffic to partially offset severe corporate travel cutbacks.

Load factors were down more than five points at both Delta Air Lines--which has been affected negatively by the Comair strike--and American Airlines. The precipitous American decline, in particular, raised concerns as observers pointed to the carrier's increased coach class leg room project that should have produced favorable year-over-year load factors.

Since the economic downturn began hitting U.S. airlines late last year, carrier officials had been hanging their hats on comparatively solid international numbers. Now, however, operations outside the United States are beginning to compound domestic softening.

Load factors for American, Continental, Delta, Northwest and United airlines in all geographic regions were down in the month of May, and some carriers are beginning to make adjustments. Delta, the only one of the five reporting less capacity across the Atlantic, said it has been moving seats back to Asia as that region's economies rebound, for example.

Many European carriers also reported lower overall load factors in the latest traffic release from the Association of European Airlines. British Airways, for example, said its load factor was down three points in May and noted a 15 percent drop in passenger traffic, including an 11 percent decline in premium traffic partially attributed to the slow U.S. economy

As bleak numbers continue to pour in, including predicted quarterly losses of up to $160 million at Delta and $100 million at American, carriers have been prompted to make network adjustments, retire less efficient aircraft earlier than expected and embark on other cost-cutting measures.

At American, CEO Don Carty indicated that the airline now is in the process of trimming capacity in weaker demand areas. "In this uncertain economic climate, how we manage our capacity will obviously be critically important to sustaining the revenue strength we've worked so hard to achieve over the past few years," he said earlier this month during the Merrill Lynch Transportation Leader's conference.

In a letter to investors and analysts earlier this month, Continental said it trimmed its full-year capacity forecast, from 6 percent to 5 percent, "to reflect reduction of marginal domestic flying in less desirable time channels and weekend reductions."

Meanwhile, United recently announced the accelerated retirement of 15 older, less efficient B737-200 aircraft, citing the soft economy, labor costs and fuel prices. As a result, the carrier's capacity for 2001 will grow only 1.9 percent, rather than the previously announced 2.2 percent. Delta, too, expects to add less capacity this year than previously anticipated.

More importantly for corporate buyers and consumers at large, the airlines have not yet successfully completed an across-the-board business fare hike in the first half of the year, after six such increases last year. Trapped between a desire to recoup fuel and labor costs with higher fares and a hesitancy to further estrange high-yielding business travelers with fresh price hikes, carriers are at an impasse. "The airlines are trying to figure out how to ensure that the demand is there, and they don't want to suppress that demand with fare increases," said Brian Mogler, director of consulting services at American Express.

America West, normally a price matcher, earlier this spring initiated a 5 percent fare hike on both business and leisure fares. After being matched by several majors, the raise eventually was retracted when traditional spoiler Northwest maintained its fare levels.

As a result, fares actually have been on the decline at a few carriers. In fact, the latest figures from the Air Transport Association, which exclude Southwest Airlines fares, showed that the average one-way fare in May was down nearly 5 percent from just a month earlier. This was the third consecutive monthly drop.

However, Buttrick noted a recent 3 percent increase on typical business fares on many hub-to-hub routes. Other fare watchers at presstime had not observed the increase.

Looking ahead, many industry observers said the rebound in corporate travel expenditures would lag behind economic recovery. James Cammisa Jr., in his latest Travel Industry Indicators, said, "Companies that have now found new ways to contain T&E spending may very well continue tighter controls. Lessons learned during tough times can carry over to better times."

With the airlines suffering through and cognizant of tighter corporate travel spending patterns, they must find ways to incentivize business customers.

"There's no getting around the reality that with softer demand, the competition for each incremental customer--and for the industry's premium customers in particular--has intensified," Carty said. "That means our revenue performance is more dependent than ever on our ability to hold on to the customers who are already loyal to us, while taking as many customers as we can away from the other guys."

With that goal clearly in mind, Northwest last month expanded its BizFlex fares into the first class cabin, offering seats in the front of the plane at a 50 percent discount or more, in exchange for booking at least 14 days in advance with a one-night stayover. Though the carrier insisted that slowing business traffic was not the driver--rather a matter of getting the proper capacity-control technology in place--industry observers remarked on the timing.

"It is no secret that business travelers will do anything to get into first class, and now you'll see a lot more make up their mind 14 days out when they couldn't before," said fare watcher Terry Trippler of Onetravel.com. He added that corporate travel managers may have to rethink recent policies that cut out premium travel, given the cost factor: "There will have to be some give and take." Trippler said that Northwest benefits from the program by identifying high-yield passengers further in advance. "If those bookings are light, they can offer more cyberfares closer in," he said.

Scott Gillespie, principal of Solon, Ohio-based Travel Analytics, however, does not expect many companies to reverse new policies. "Travel managers are under so much pressure to control costs that they would be very concerned about sending the wrong signal by letting people book first class, almost regardless of the price," he said. "Certainly, some companies that adhere to a lowest logical fare policy might allow first class if the BizFlex fare comes within their price limit--typically $100 for domestic--but I don't see that happening."

While Delta followed Northwest's move, American matched and then rescinded and United did not match at all.

Upgrades into the first class cabin also are becoming more prevalent as carriers incentivize travelers booking unrestricted full-fare coach tickets. US Airways, for example, quietly rebranded its upgrade program to GoFirst, conceptually similar to TWA's First Up offering.

Trippler said Continental and America West have similar upgrade promotions. "They all have expanded these upgrade opportunities in the past few months," he said. "Generally, they were for connecting flights and not available to and from hubs, but we now are seeing it brought to more nonstop and hub markets."

Travel managers said they also have seen more frequent flyer incentives coming from carriers, both individual--rewarding travelers with double and triple mileage bonuses on key routes--and corporate. "Airlines are starting to recognize that people will forgive additional costs for better service, particularly frequent flyer status. And 80 percent of the people who book trips through our corporate group want upgrades," said Georgina Smith, vice president of travel for Cablevision in Bethpage, N.Y. "From a corporate point of view, when I negotiate, that is one of my main points, and I have been able to secure that type of thing more recently. Airlines have to incentivize more these days and the one that provides me with the best service consistently gets the travelers."

Continental, for example, said it might look at certain poorly performing markets and make them more attractive with frequent flyer mileage bonuses. "Clearly, business travel is down significantly, more so than we originally forecast," said Dave Hilfman, the carrier's vice president of multinational sales and revenue programs. "But we're staying the course, in good times and bad."

Delta, too, has recognized the need to deepen discounts and offer other corporate incentives. Its new president and COO Fred Reid told BTN that adjusting thresholds on corporate commitments "certainly has been part of the dialogue" (see story, page 1).

Buyers' constant efforts to contain air spend now is even more pertinent as senior management mandates cost reductions. "We have seen a higher emphasis on the comprehensiveness of airline purchasing programs," said American Express' Mogler. "Traditionally, maybe 80 percent of a company's expenditures were covered under a discount, but now they are trying to raise that so every trip is with a preferred carrier and on an associated discount."

Mogler added that more corporate buyers are pushing nonrefundables, asking travelers to use Saturday night stay fares and splitting the savings and exploring travel alternatives. "The point is not necessarily the savings," he said, "but the collaboration with the end user, the traveler.