With the airline industry potentially facing a new crisis brought on by record fuel prices, corporate travel managers are likely to see higher airline ticket prices this year, while their travelers face crowded planes, delayed flights and the possible loss of certain nonstop options. That assessment, shared by analysts speaking here this week at a National Business Travel Association forum, does not preclude the possibility of new opportunities to secure better prices and, in some cases, improved services.
The near-term outlook, however, is gloomy. "We're in for a little more of a difficult time before we see blue skies again," said Randy Babbitt, a director at management consulting firm Oliver Wyman. "I have to question how much profitability U.S. carriers will have in the short term."
"We are facing another crisis in the airline industry of enormous proportions," added Frank Boroch, a managing director at Bear, Stearns and Co., referring to the impact of oil prices, which this week neared $110 for a barrel of crude. "The airlines are perpetually suffering from an inability to pass on this additional cost to their customers."
Boroch explained that tighter corporate travel policies this decade are partly to blame for airline woes. "If you look back to 2000, tickets of $500 or more made up 42 percent of domestic airline revenues," he said. "That figure bottomed at around 12 percent in 2005 ... we saw ticket prices plummet at the corporate level" as fewer business travelers purchased premium-class tickets. Though that percentage since has risen from the low point, Boroch said the drop in the number of higher-priced tickets has "essentially equated to about a $1.5 billion loss to the industry."
Corporate travel policy adjustments, however, cannot fully insulate most organizations from higher air transport costs this year. "Domestically, the corporate customer will continue to bear the brunt of higher fuel prices because of your lower elasticity," he told NBTA forum attendees. Moreover, " U.S. carriers have begun to restore the fencesthat were dismantled a few years ago to differentiate between business passengers and leisure passengers."
Beyond prices, other challenges include flat or reduced domestic capacity, crowded airplanes (which also means fewer upgrade possibilities) and the elimination of certain routes. "Leave a lot of extra time in your schedules," Boroch said. "I would not be surprised if your travelers already have nonstop routes booked but find at the last minute they have been re-routed on one-stop connections as airlines find it no longer is profitable to operate that flight."
Regarding infrastructure strains, "economic growth could be tapped out, effectively, because we can't get people and goods through the system as efficiently as we need to," Boroch added.
Other new or exacerbated industry challenges include pilot and air traffic controller shortages and, for U.S. carriers in particular, an equipment disadvantage, according to Babbitt. "American, United and Delta need 1,500 planes. If they called Boeing tonight, those airplanes would not be built for five years," he explained. "We are going to face an equipment competition for quality of service in the airplane, quality of atmosphere in the airplane, etc. We're going to be a little behind."
On the cost side, Babbitt said opportunities to reduce non-fuel costs "are incredibly limited. We have extracted about everything we can."
And in the short term, there is not much airlines can do to mitigate jet fuel price hikes, especially when the market appears unwilling to accept price increases. "When I see [airlines] offering their service from Los Angeles to Heathrow roundtrip for $379--knowing what kerosene costs--that's not a for-profit operation," Babbitt added.
"In nominal terms, domestic tickets are still about 10 percent below year 2000 levels, while the cost of jet fuel today is about 350 percent higher," Boroch explained. "So there has been a disconnect between what the traveler has been paying and the input costs that disproportionately hurt airlines immediately."
Good for travel buyers but bad for airlines, Boroch said additional competition on long-haul routes--where inflight service is improving for premium passengers--would result in "a secular decline in international yields beginning in the next two years, and that will help a lot with your budget planning."
Though U.S. airlines presently seem unlikely to maintain profitability, Boroch ended on an optimistic note: "The industry will weather this. Five years ago we were telling investors that the airline industry was broken with oil at $40 a barrel. Now we are at over $100, and I continue to be amazed at the industry's ability to adapt."