Recovery?: Airlines See Clearer Sky

A string of recent positive developments for the U.S. airline industry suggests a brutal two-year storm finally may be blowing over. Though the climb to profitability may take months for some and years for others, carriers are cautiously optimistic as they enter the busy summer travel season.

Much of their long-term prospects, however, depend on the resumption of business travel, the pace of which will be dictated by general economic recovery and performance of each company's specific sector. Any sign of sustained recovery likely will not be evident until later in the third quarter at the earliest.

Nevertheless, airlines appear in a much less tenuous position than they were during the horrific first quarter, even after taking into account regular seasonal trends. Some have reported "stronger" advance bookings into the summer, particularly in leisure markets, and certain carriers have begun restoring domestic and international services. Sabre Airline Solutions, in an Internet presentation last week, said it expects June traffic to be up 3 percent to 4 percent versus last year. Meanwhile, airline alliances promise to generate incremental revenue, and a recent fare hike, the first in a long while, may represent a modest beginning to an improving pricing environment.

At the same time, carriers are cutting the big ticket cost item of labor and many smaller cost items while making much more efficient many processes, including passenger processing at the airport. The federal government also recently lent another hand to the industry, reimbursing carriers for security costs roughly to the tune of $2.3 billion and suspending security taxes into the autumn.

Even stocks have bounced back a bit and airline analysts have taken a slightly bullish stance. "Each of the four primary profit drivers—capacity, oil, labor and demand—is getting better," said UBS Warburg analyst Sam Buttrick, who recently narrowed his industrywide loss estimate for 2003 to $7 billion, from $7.8 billion.

"Fundamentals have bottomed, supply and demand is in balance and our universe of airline stocks is on track to either meet or beat" current second-quarter earnings targets, added Deutsche Bank Securities analyst Susan Donofrio.

Key to sustained recovery is corporate travel, which slowly is picking up, according to some travel agencies and travel managers at several large companies. Carlson Wagonlit Travel, for example, said transaction volume in the past month rose between 10 percent and 15 percent.

"The trends are continuing and are even better than a few weeks ago," when transaction volumes returned to pre-war levels, said Ron DiLeo, Rosenbluth International strategic travel solutions COO. "There is a pent-up need for travel right now."

"Our agents have been cranking away the past few weeks," noted Suzanne Fletcher, director of travel and meetings for Federal Way, Wash.-based Weyerhaeuser. "We are in a brief period of optimism. I want to say that overall company traffic in 2003 will be up from 2002," but that outlook is subject to change during the next few months.

Not everyone is bullish. "Most of our big corporate clients still are reasonably cautious," said British Airways CEO Rod Eddington during an analysts briefing last month in New York. "They are in the mindset of recovery but everyone is waiting for signs that the economy will grow. We should not be too optimistic about revenue. That is why we are focusing on costs."

Meanwhile, several U.S. carriers in their June schedules restored many international routes and domestic frequencies. Both US Airways and Delta Air Lines, for example, returned to hourly schedules for shuttle operations in the Northeast corridor. Delta's June capacity, however, still is 7 percent below original plans.

"Future bookings have not returned to pre-war demand levels, so capacity reductions are still necessary," said Subodh Karnik, Delta senior vice president of network and revenue management. "The recovery in demand following the Gulf War in 1991 took about nine months. We don't see any indication that this recovery will be any different."

While Delta's outlook is among the more bearish, United's is among the more optimistic. The carrier restored 162 daily flights, or 10 percent, to its June schedule, including increased service to many domestic and overseas destinations. "As we prepare for the summer travel season, we have been encouraged by the upturn in bookings that indicate a strong recovery in many of the markets we serve," said network planning director Marty St. George.

Airline service restoration in June came even as the Big Six carriers were announcing more monthly traffic declines in May, further indication that advance bookings may be firming. Indeed, May traffic reports had positive tidbits. American, for example, said year-over-year monthly traffic declined another 5 percent, but said results, including a four-point load factor improvement, were "better than expected."

A step below the Big Six, traffic in May grew 11 percent at Alaska, 7 percent at America West and 3 percent at Southwest.

At Continental Airlines, where traffic declined 6 percent, estimated revenue per available seat mile rose between 1 percent and 3 percent. Similarly, US Airways, whose traffic in May slid 12 percent, estimated monthly RASM rose 0.5 percent to 1.5 percent. Those increases may be early signs of a strengthening revenue environment.

Another boost for the airline industry was the opportunity taken by most domestic carriers to implement a $10 roundtrip price increase on June 1 . The increase should not impact most passengers, however, as it essentially replaced the $2.50 per-segment security fee the U.S. government suspended at that time. Nevertheless, it will generate extra revenue for carriers.

"Carriers said, 'Enough blood. We need to make some money,' " said Steve Shook, CWT vice president of strategic sourcing.

"There is no elasticity in the corporate travel space," added Rosenbluth's DiLeo. "Raising prices does not make corporate travelers travel less."

With fares generally at extremely low levels, demand showing signs of strengthening and carriers slowly matching supply, prices can only go up. The question is when.

Eclipse Advisors managing partner of airline procurement services Michael Lynch, for one, predicted airlines would show renewed pricing power during the second half of the year. "We will see the average segment cost [for airlines' corporate clients] inch up in the third and fourth quarters as the economy improves and pressures prices upward and carriers reduce inventory in low-fare buckets," Lynch augured during a recent Eclipse Web presentation.

Some already are seeing average ticket prices swing upward. Chicago-based Tower Travel Management, for example, said clients' average ticket price was up 8 percent year to date.

CWT's Shook cautioned that many recent positive developments simply may be a result of normal seasonality. "I feel better about it all than I did a month ago, but I want to see sustainable trends," he said. "We will watch the month of June very closely. Hopefully, the worst is behind us."

Several recent studies strengthen such hopes. More than 80 percent of 1,600 U.S. business travelers expect to maintain or increase their business travel during the next six months, according to a recent report from Accenture.

The latest Survey & Analysis of Business Travel Policies & Costs produced by Runzheimer International suggested corporate air travel spending will increase 10 percent in 2004.

J.P. Morgan Securities analyst Jamie Baker, in a research note issued last week, estimated industry revenue in 2004 would be up 9 percent after a 3 percent decline in 2003.

Said UBS Warburg's Buttrick: "It is getting better out there, but it is far from good."