A general lack of recovery in the airline industry likely will drive up ticket prices for U.S. corporations next year even as the overall economy improves, business travel demand returns and low-cost carriers exert greater influence.
Predictions on corporate airline costs vary from a marginal increase to as high as 10 percent, dependent as always on market-specific competition and other factors that impact the fragile industry. The price of fuel, for example, will provoke repeated attempts to raise fares, while potential carrier liquidations and consolidation would alter system capacity. At the same time, low-cost carriers are seeing costs slowly increase and soon may have to start raising their fares.
Meanwhile, airlines may enact further airfare reform as a means to improve the business mix and reverse the downward trend on passenger yields and unit revenues. The degree to which such fare rationalization changes or eliminates corporate discount programs remains to be seen.
At the same time, fresh attempts by carriers to pass along distribution costs likely would increase average ticket prices for their corporate clients, dependent upon the mechanics of new distribution models.
Demand in international markets, steadily recovering throughout 2004, is expected to strengthen further and drive ticket prices upward. Though intraregional flights will be subjected to an increasing level of low-cost competition, intercontinental routes have few if any low-cost competitors and still will be defined by high-touch premium services and higher airfares.
"We forecast our volume to be flat for next year, so it is a question of cost per segment," said Eastman Kodak manager of corporate travel services Doug Baldy. "We are guessing there will be price increases on international routes because planes have been so full. In the domestic market, you have to believe there will be price increases, maybe around three percentage points. Competition has driven roundtrip fares from Rochester to very low levels that cannot last."
Baldy also said that attempts to realign distribution costs eventually would stick. "Next year, something will come to a head with the global distribution systems, which in the short term will add costs to corporations."
"We are bracing our customers for increases in average fares on the order of 5 percent to 10 percent," added John Smith, president of Tower Travel Management, a Chicago-area travel management company. "I would be shocked if we only see the status quo." Smith cited the extremely low airfares that, in rational terms, cannot go much lower and financial pressures faced by such struggling carriers as ATA Airlines.
Though US Airways continues to roll out its simplified, lower-fare structure, its future is uncertain
(see story). It already dramatically has downsized Pittsburgh operations and could be forced to abandon other routes. Delta, meanwhile, is deconstructing its Dallas hub.
Though low-cost carriers appear most likely to fill the voids left by retreating majors, those airports losing a competitor may experience rising ticket prices.
Overall, American Express predicts an increase of 1 percent to 3 percent for typical domestic business fares in 2005, defined as the lowest fully refundable economy fares available to business travelers with no more than three-day advance purchase requirements. "Business traveler demand, increased fuel costs and rationalization of seat capacity by the airlines is expected to place upward pressure on airline prices over the next year," the company said in its global forecast. It noted, however, that low-fare competition and the consequences of localized airfare reform could mitigate fare hikes. "For corporate travel buyers, it is expected that corporate discounts will be reduced to reflect the steep drop in published fares in markets where competition is intense. In other cities, strong business demand is expected to keep discounts flat."
Runzheimer International in its 2005 forecast predicted a 10 percent increase in air travel volume but only a 5 percent increase in business travel air expenses, citing the impact of low-cost airlines and intense competition between major network carriers. To offset that increase, Runzheimer suggested companies explore private aircraft, which maximize traveler productivity, and consider "group purchasing of blocked space" on commercial carriers.
Looking back over the past few months, domestic fares generally fell, while international fares moved upward. The Air Transport Association, compiling data from eight major U.S. airlines, said domestic passenger yields fell 2.5 percent in July, representing the third consecutive month of year-over-year declines. Revenue per available seat mile fell 1 percent in July, following a flat June and a 2 percent drop in May. Conversely, international passenger yields rose for 10 consecutive months through July, while international RASM has not declined in more than one year.
ARC reported an 8 percent drop in August domestic fare volume year over year, versus a 9 percent increase in international fare volume.
Agency auditing company Topaz International said statistics from its database showed monthly declines in August for average cost per domestic passenger name record and average cost per domestic segment. The same measurements for international routes showed marked increases.
American Express anticipates that strength in international markets will continue into 2005 and push fares up another 2 percent to 5 percent. The company noted particularly strong demand between Europe and the Americas and on transpacific routes.
Amex specifically predicted transatlantic business class fares will rise more quickly next year than this year and said it has seen "a reduction in discounts being offered on routes between the United States and the United Kingdom."
Other factors include foreign exchange rates—currently negatively impacting Europe-bound U.S. corporate travelers—and fuel surcharges.
"In many cases, it is unlikely that a fuel surcharge can be negotiated out," American Express said. "Corporate travel buyers, however, should let their suppliers know they are aware of airline costs, and if they have the volume, ask for deeper discounts in other areas to offset the cost."
American Express also predicted a 3 percent to 4 percent increase in long-haul business class throughout Asia and flat to slightly higher fares in key Latin American business markets.