JANE LEVERE NEW YORK
Falling yields and lower business traffic are inextricably linked. What is at the root of the shortfall and what can the carriers do to rectify the situation?
Even before the fallout from the events of 11 September started to be felt, US carriers were already reeling from a heavy drop in revenues. And behind that lay the unexpectedly rapid fall-off in business traffic. Key questions that airlines still face in the wake of the terrorist attacks are how soon business travel will return and, when it does, how will the market have changed?
The US majors derive two-thirds of their passenger revenue from business travel. So the omens were bad when corporate traffic showed signs of significant weakening in April, a trend that became overtly apparent in May.
Sam Buttrick, airline analyst in New York for UBS Warburg, calculated that from May through July, total domestic revenues of US majors fell 10%, while their international revenues also dropped, though not as much. During this period, he said, revenues from business travel fell even more steeply than overall travel - approximately 15-16%. These declines, predictably, have a direct impact on yields. The trade group Air Transport Association found that yields for July 2001 were down 9.2% versus the same month in 2000, an almost unprecedented year-over-year drop.
It's the economy
Buttrick attributed the decline in business travel primarily to weak corporate profits and secondarily to the emergence of bandwidth alternatives to business trips, especially Webcasting.
These findings are borne out by research done by various business travel organisations and by anecdotal evidence from corporate travel managers and travel agency executives. A survey early this year from the National Business Travel Association - a trade group representing over 2,000 travel managers - found that 77% "had responded to the economic slowdown by reducing travel."
Meanwhile, the Business Travel Coalition - a lobbying group that represents the business travel interests of such corporations as Daimler-Chrysler and Procter & Gamble - issued in June the results of a survey of 62 companies that normally spend a total of $6 billion on annual travel and entertainment for their US-based employees. It found that 86% of the companies intended to reduce travel spending this year. Their average cost reduction goal was 28%, the equivalent of $1.7 billion.
US corporations that had reduced spending on business travel include, Siebel Systems, the Silicon Valley software company. It cut business travel spending in half during the June quarter. And US employees of Pricewaterhouse-Coopers have so far this year reduced purchases of air travel by 20%. This fact is telling in that these employees last year spent $383 million on air travel. After IBM the firm is the second largest corporate buyer of business travel in the USA. Mark Williams, the company's US director for travel, says this was the first time it had ever cut its travel budget.
However, airline analysts note some striking differences between the downturn which was already gripping the US majors before 11 September and the recession which hit in the early 1990s.
UBS Warburg's Buttrick suggested that corporate cuts in business travel budgets were deeper than a decade ago. "While corporations always respond to profit pressure by slashing their travel budgets," he explained, "all indications are the cuts are much deeper this time around."
However, Brian Harris of Salomon Smith Barney found that carriers are acting more rationally in responding to the downturn than they did in the 1990s. "You had a number of airlines that were bankrupt then, and a number of airlines that didn't have a good yield management system and were pricing irrationally. They used kerosene to put out the fire with fare sales," he suggested. "It's more important that the weaker airlines have gained pricing and yield management tools than that the stronger airlines improve theirs, because pricing always falls to the lowest common denominator."
In its pre-September look to the future, however, the Business Travel Coalition was bearish about the airlines' prospects. In a report, it predicted that "when the national and international economies rebound, business travel levels will likely not snap back as in previous economic downturns." Unlike the last downturn, it continued, "circumstances today may preclude a full rebound in business travel demand. Business airfares have increased over 50% in the past five years. The airlines may have pushed the 'let's-make-hay-while-the-sun-shines' approach too far in this cycle. There is ever-deepening resentment toward the airlines."
In addition, the report found that "the travel experience is considered by many business travellers as something to be avoided if at all possible. (With) video conferencing being comparatively cheap and effective, [and] web conferencing [also] proving effective, there are now real alternatives to many categories of travel."
The BTC's negative analysis of the situation, however, appeared to be in the minority, at least ahead of the terrorist attacks. Buttrick, for one, expected business travel to rebound next year, with corporations increasing their air travel expenditures by 6-7%, compared with what he anticipated would be a 12% decline this year. This compares with a 10-12% increase in such expenditures in 2000 from the previous year.
Harris predicted that "if the economy picks up, corporations will ease up on their budgets", adding, "I don't believe in quantum changes." Now, after the terrorist attacks, Harris continues to take a moderate line on the airlines' respective futures, believing air travel may well return to "normalised levels" in about a year. He adds that while the revenue hit may be deeper than that experienced during the Persian Gulf crisis, it is unlikely to be materially longer.
Looking at the post-disaster future of corporate traffic, Kevin Mitchell of the Business Travel Coalition states: "Some of the companies are making preliminary estimates that they'll be at 80% of their pre-11 September travel." However, he adds that figure does not take into account the previous cutbacks undertaken when the economy lagged.
Some industry insiders believe that once the industry recovers from the current turmoil, it would be useful to focus on the underlying causes of the drop-off in business travel that had already become evident before.
Williams at PricewaterhouseCoopers said before the attacks that "even when the economy comes back, we will continue to focus on strict compliance (with corporate travel management policy) to make sure our employees make smart purchases". Although he said videoconferencing and Webcasting are gaining some favour as a substitute for business trips, "we're in the business of servicing our clients. There's still nothing like a face-to-face meeting. We have to be there and we will continue to be there." And he predicted his firm's air expenditures next year would be "flat" to "up modestly".
Before September, there were signs that the situation might be ready to turn. Hal Rosenbluth of Rosenbluth International, the third largest US corporate travel agency, predicted business travel would become robust again, noting in early September, that "for the past five weeks, we've seen an uptick for the first time in air bookings of 18 of our top 25 corporate clients, all Fortune 500 companies."
Thom Nulty, president of Navigant International, the USA's second biggest corporate travel agent, also expected a recovery next year. "Businesses will find that travel is essential. Without it, they damage their relationships. In fact, business travel is the key to success for the turnaround of the whole economy. Travel is essential to grow businesses, find new customers and maintain products and equipment for existing clients."
Strategies for the future
In interviews conducted before the terrorist attacks, observers suggested a variety of means that carriers might consider to improve their fortunes. Marianne McInerney, executive director of the NBTA, said her members - 95% of which have negotiated rates with two or more carriers - are successfully renegotiating rates for 2002. These rates are dropping anywhere from 6% to 20%, compared with those negotiated for 2001.
Similarly, Nulty found that carriers are increasingly willing to give corporations steeper discounts in certain markets, provided "the airlines get more than a fare share of business from the corporations". Turner Broadcasting Systems, parent of CNN, added that carriers appeared more willing to offer fixed "flat" fares between two cities than they were even a year ago, while PricewaterhouseCoopers noted that its average ticket prices had dropped 14%.
Rosenbluth said the real key will be for carriers to lower their "Y6" walk-up fare, the full fare on which other discounted fares are based. He added that "if they bring the Y6 fare way down, they will bring back passengers who have been left out of the market entirely. They need to reward firms that hit their market-share hurdles and to redesign programmes for those that don't. Then they will get people back on planes and significantly increase their revenues."
Perhaps most important, Buttrick suggested that to win back corporate travellers, the airlines will need to improve performance. They must, he said, offer more reliable service with far fewer delays and need to continue the deployment of technology at "every stop along the way", including the airport. "If corporations broadly viewed air travel as a compelling value, it wouldn't be the first item on the chopping block."
Source: Airline Business
