Air travel forecast: Fewer flights, higher fares
— -- Most major U.S. airlines posted another quarter of sizable losses last week. The top ten U.S. airlines combined have reported a loss of nearly $2.5 billion so far this year, and most airline CEOs are painting a gloomy picture for the remainder of the year. Unfortunately, bad news for airlines doesn't bode well for business travelers either.
Pinched by high fuel costs in 2008 and the global recession of 2009, U.S. airlines continue to shrink, eliminating unprofitable routes and decreasing capacity to align their operations with weakening travel demand. To cut costs and fill airplanes, U.S. airlines reduced domestic capacity by more than 12% and international capacity by 4% in the past two years according to the Air Transport Association (ATA), but with 9% to 10% fewer air travelers, additional capacity cuts are likely.
Worse than dwindling passenger volumes are steeper revenue losses. ATA says U.S. airline domestic revenues declined 21% and as much as 23% to 25% on many transoceanic routes from January through June vs. the same period last year. When revenues decline at twice the rate of passenger volumes, it clearly indicates a disproportionate loss of high-end business travelers.
The International Air Transport Association (IATA) says the number of passengers traveling on "premium" first- and business-class tickets worldwide has steadily eroded every month for the past year, with a 23.8% decrease alone in May. IATA projects the decline in premium passengers translates to a 40% to 45% revenue loss for the world's airlines.
IATA concludes many business travelers may be downgrading to economy class to cut travel costs, in addition to canceling or postponing business trips. Meetings and conventions have taken the hardest hit, particularly to destinations perceived as "fun" places, like Florida or Las Vegas. More than one corporate travel manager told me that many former road warriors have transitioned into "conference-call warriors" as businesses seek to curtail travel spend in this age of austerity.
To illustrate the dire predicament for airlines, American Airlines reduced capacity by more than 7% this year, but still saw a 2% decline in "load factor," or the percentage of seats filled, over the past six months. In the second quarter American raised $565 million in checked-luggage and other ancillary fees and spent $910 million less on fuel vs. 2008. Yet, with revenues down by 21%, or a whopping $1.29 billion, the airline suffered a $390 million quarterly loss.
While the dearth of business travelers is causing airlines to shrink, capacity reductions adversely affect those still traveling for business. Of the country's 67 largest airports, 55 have lost more than 5% of scheduled flights and 19 have lost more than 20% of departures in the last two years, according to ATA. Smaller hubs like Cleveland, Cincinnati, Kansas City, Pittsburgh and St. Louis have been among the hardest hit, as well as secondary airports in major cities like Burbank and Ontario (Los Angeles), Oakland and San Jose (San Francisco), or Manchester (Boston) as airlines consolidate operations into fewer airport locations.
Capacity cuts at hub airports mean fewer connections, longer transit times, and decreased productivity for business travelers. Many smaller airports have also endured substantial air service cuts. ATA says 87 smaller U.S. airports lost all commercial airline operations during the current wave of capacity cuts, which means many business travelers may be forced to drive longer distances and spend more time reaching their destinations.
Despite fewer overall passengers, airline capacity cuts are the likely cause of a 17% increase in involuntary denied boardings (confirmed passengers "bumped" off flights) over the past two years.
Fortunately not all of the news is bad for business travelers. With fewer airplanes in the sky, on-time domestic arrivals increased from 73.4% to 79.2% in the past two years and flight cancellations decreased by 11.5%. This is likely due to less congestion during inclement weather and more aircraft available for substitution when mechanical problems occur.
With fewer passengers checking fewer bags to sidestep checked-luggage fees, the number of mishandled bags declined by 40% over the past two years and customer complaints dropped by 25%.
According to First Class Flyer, recent hype about unprecedented international business-class fare sales has been overblown, but in an ironic twist, airlines are offering very frequent fliers more inexpensive or free upgrades to fill empty first- and business-class cabins likely vacated by those same frequent fliers who may have downgraded to economy class in this recession.
According to Bing.com Travel (formerly Farecast.com), domestic economy-class fares have declined, but may be creeping upward again. Last week, the average round-trip domestic air fare was $274, down 25% from a high of $361 on June 7, 2008, but up 8.3% from a low of $253 on April 2, 2009.
Though some fare increases are seasonal, low-cost carriers (LCCs) like AirTran, jetBlue, and Southwest may be partially responsible for the decline in domestic air fares. While higher fuel prices hurt their bottom lines in 2008, these three airlines had profitable second quarter earnings as they were affected less by the decline in high-end business travelers and likely helped by travelers seeking bargains in the economic downturn.
Though the fuel crisis and recession forced LCCs to curtail ambitious growth plans, AirTran and jetBlue were the only two among the top ten U.S. airlines to increase capacity over the past two years with growth rates of 5.3% and .6%, respectively. If LCCs can continue to make money and grow, domestic air fares may stabilize or even decline again, but only if fuel prices are stable and the recession doesn't worsen.
Unfortunately, jet fuel prices have already risen from $1.10 per gallon in March to $1.90 per gallon recently, according to ATA. As the recession continues with no end in sight, the big network airlines will continue to shrink, creating greater inconvenience for business travelers, and higher oil prices will likely drag air fares up as well. Either way, it's not good news for business travelers.
Send David your feedback: David Grossman is a veteran business traveler and former airline industry executive. He writes a column every other week on topics of interest and concern to business travelers. E-mail him at travel@usatoday.com.