The slump has come early for the major US Airlines, with business travel numbers in free-fall, even though the economy is still just about managing to grow. Ominously there is evidence that this time the cuts may be structural rather than snapping back once the good times return. It may be time for the big airlines to adapt.
It was the worst of times, it is the worst of times and it does not look likely to be getting any better. The revolt of the networking classes has finally started to play out as US business travellers, the laptop-lugging legions who are the basis of revenues and profits for the US majors, have rebelled against the airfares they have long loved to hate. That has taken a bite out of yields just as the slowing economy had begun to clear out the back of the plane as well as the front.
The irony is delicious: airlines learned how to impose discipline on themselves and to an extent on their work forces after the last go around. Now, alas, their best customers are showing that they, too, have learned this lesson. Just as the airlines, after the recessions of the early and mid-1990s, exerted self-control and finally began bringing the supply of seats in balance with demand, now the corporate travel departments are reining in their own travel expenses.
Of course, they do that every downturn, but this time may be different, says Kevin Mitchell of the Business Travel Coalition, a group backed by medium- and large-sized corporate travel departments. Of 65 companies that Mitchell surveyed in the summer, 86% said they were cutting travel expenditures, and cutting it by an average of 28%. More importantly, most were doing so as a long-term structural change instead of sitting and waiting for good times once again to roll. In late summer, the National Business Travel Association found that its members, too, had made permanent changes in their budgets.
The results continue to show up in the yields of the majors, which hit their lowest point since 1992. Use of first-class fares has fallen to a record low of 2% of business travellers, and full-fare coach purchases fell to just 7% of the total, both records in the history of the American Express Business Travel Monitor.
There could be more bad news ahead when corporate travel budgets for 2002 are finalised in October. Analysts are already totting up the damage. The slump is now expected to cost the industry up to $2 billion in losses this year and the effects could linger.
Meanwhile the US carriers have already done many of the right things, having learned lessons they will not repeat this time. Hence the capacity cuts at the likes of American Airlines, which has accelerated fleet retirements four times this year and spies no foreseeable near-term improvement. But there are not that many more candidates for cost cutting. True there are some further savings to be had from trimming travel-agent ticket commissions. but even estimated industry fee savings of some $350 million are paltry compared to the $3 billion plus in extra labour costs that the majors face.
The slump perhaps is part due to the inability of the big carriers to move beyond wanting to be all things to all travellers. Segmentation has taken place externally through new entrants, rather than within the mega carriers. Hence the even-better-than-predicted success of JetBlue after its first 18 months, the strong rebound of AirTran Airways and the unstoppable prosperity of Southwest Airlines. These carriers have found the right formula for business travellers as well as backpackers. They have led capacity growth, as demonstrated in the annual World Airline Rankings included in this magazine. Also, and perhaps more significantly, the rapid increase in fractional ownership of business aircraft, up more than 40% last year.
James Fallows, a registered intellectual, has even made a minor best seller out of the trend. In Free Flight he urges use of a new generation of small affordable business aircraft or "personal jets".
The closest the US majors have come is at United Airlines, which will have its fractional ownership unit going next year. And United has taken a page from the Southwest fare book, a page that is catechism to every successful low-fare carrier. It has, permanently it says, cut walk-up or business fares on trunk routes such as Chicago to Dallas/Fort Worth and has also lifted the most onerous restrictions by ending the Saturday-night stay rule and by selling them on shorter notice.
One would think that consolidation would be the natural reaction of any industry in such a slump. But that is not this year's answer, as United/US Airways showed. Having tottered for months it then fell flat on its face as the US competition authorities made clear that consumers and not airlines come first, as indeed they do over everything from online music and CDs to baby food.
Does this mean that all consolidation is over? United president Rono Dutta's remarks in early August may indicate the way ahead: "Right now all we can do is manage our own house and try to get our costs down during the revenue slump. There's little we can do about corporate spending," he told reporters, though he calls the timing of strength of the recovery "debatable".
But in an industry where so many competitors each has such a limited market share, "I think consolidation is inevitable," Dutta says. Inevitable, yes, like the recovery, but that does not mean immediate or even pending. These times may last some time.
Source: Airline Business
