Pulling the revenue levers
With it now looking as though 2007 will be the peak year of the upswing that started in 2003, attention should have already focused on addressing new revenue and cutting costs. While for the no- or low-frills airlines the issues relate to seeking out new bases and opening new routes to attract new traffic, there is also evidence of new sources of ancillary revenue where to an outside observer the nature of the passenger spend becomes less discretionary.
The key to structural revenue growth for network carriers is through more passengers at higher fares flown through broadly steady state networks. Against the background of an economic slowdown, the issues are inevitably where the passengers will come from and at what price. There is little not known about the response of airline managers to the first signs of a slowdown: issue edicts to various departments to reduce costs while at the same time cutting fares and finding the level at which passengers will travel on your airline. For the scheduled airlines the main levers to pull are on the demand side, whereas for a number of charter operators and integrated tour operators we have already seen suggestions of supply side adjustments in the hope of keeping prices up.
However, against a falling level of overall demand there are a number of secondary effects that will come into play. From the perspective of the corporate traveller, the two easiest budgets for any company to cut are travel and marketing. On the travel budget the resulting outcomes are on the volume of travel and the part of the aircraft in which employees travel. The airline response is lower fares in the marketplace or the "corporate deal".
For the leisure traveller, the accommodation element of the trip can account for some 75% of the total cost before "discretionary spending". The issue in an economic slowdown is more likely to be about reductions in the total cost of the trip rather than the airfare alone. Notwithstanding this, fare sales have produced a number of bargain offers to and from the UK for example.
The reality is that in a downturn the impact of a reduction in fares overall is broadly a zero sum game, which results in the redistribution of traffic rather than an expansion of the market. The impact is more obvious in terms of "local" traffic but is also an issue for transfer traffic as this too is a target. But if the point-to-point fares are also falling, the economics of the transfer traffic can change dramatically as the breakeven load factor rises.
In a local UK context, Terminal 5 at London Heathrow should give British Airways the opportunity to use transfer traffic to grow. Against this background it is of particular interest to examine some of the current pricing across the Atlantic for travel in the early part of February. In broad terms, economy yields for mainland European carriers to the USA are markedly better than from the UK. To New York JFK, for example, they are some 56% higher per kilometre in respect of restricted economy and between 50% and twice the ex-UK fare for unrestricted economy fares on point-to-point services. This situation reverses in the case of business class fares, where those from Heathrow yield more than twice the revenue per kilometre than those from selected European origins. If we examine transfer fares there are some interesting examples. An unrestricted business class ticket from Berlin to New York is almost £300 ($590) cheaper each way on BA via Heathrow than non-stop on Lufthansa.
The challenge in the downturn falls on the revenue management department of any airline. The real risk for the airlines is that as the market faces exhaustion, the only outcome from fare reductions is that the traffic is redistributed at ever lower fares and it then becomes challenging.
Source: Airline Business
