As anyone who flew this summer can attest, U.S. airlines did a pretty good job filling their airplanes, particularly on domestic routes.
But like a summer romance that comes to an end, the question is what happens post-Labor Day, with the family vacations over and the kids back in school.
Airlines are particularly worried about whether they’ll attract the higher-paying business travelers, many of whom this year have decided to stay home or sit in a discounted seat in coach rather than buy a full-fare ticket.
“There’s clearly, at the right price, plenty of leisure demand,” Continental Airlines Inc. chairman Larry Kellner said at a National Business Travel Association convention late last month. “The real question is: What’s the right business demand as we come into the fall?”
The nation’s nine largest carriers as a group have cut their capacity sharply from summer 2008, down 6.2 percent. That has allowed them to fill a greater percentage of their seats, up 1.4 percentage points to 85.8 percent, despite a 4.7 percent drop in traffic.
The airlines cut their domestic capacity more deeply than international capacity, and the domestic load factors reflect the results. The carriers filled 86.6 percent of their seats on domestic flights, up 1.8 points, despite the nation’s deep recession.
International load factors also climbed to 84.4 percent, but by only 0.5 points above the numbers for June-August 2008 lodged by the largest international carriers – Delta Air Lines Inc., American Airlines Inc., United Airlines Inc., Continental and US Airways Inc.
Airline analyst Hunter Keay of Stifel Nicolaus & Co. is pessimistic about what comes next for airlines.
“Despite currently strong load factors and evidence of improved close-in bookings, passenger volumes are almost certainly, in our view, about to fall precipitously after Labor Day,” Keay wrote in an Aug. 26 report. “Current volumes are driven by leisure travel, which tends to decline once schools reopen.”
Business travel, the key to airline profitability, usually comes back when unemployment falls, Keay noted, and that tends to come toward the end of an economic recovery, not the beginning.
Keay also saw ominous signs in the airlines’ recent announcements that they were raising baggage fees on domestic trips and initiating fees on international travel.
“In our opinion, these higher fees indicate recent airfare increases have been marginal, and the near-term outlook for substantial yield growth remains poor,” Keay wrote.
But American Airlines executive Dan Garton said he is encouraged by the trends going into the fall. While demand from business travelers isn’t good enough, it’s better than it has been, he said
“We have seen the trend line on corporate travel improve. It’s still down from last year, but it’s down less than it was,” said Garton, American’s executive vice president of marketing.
In previous months, “People have described it [demand] as a flattening out,” he said. “Now we can describe it as inching upward.”
Continental’s Kellner said business travel is “a little better” than it was in April and May.
“A couple of months don’t make a trend yet,” he said. “But we do feel some sense that things have stabilized and moved up a bit.”
Speaking with Kellner at the NBTA meeting in San Diego, Southwest Airlines Co. chairman and CEO Gary Kelly said Southwest set a record for itself when it filled 83 percent of its seats in July, albeit with a lot of leisure travelers.
“I think the concern right now is with business travel. … It’s very typical in a recessionary environment to see a drop in business travel. We’ve definitely experienced that. We’ve seen some markets off as much as 25 to 30 percent,” he said
“We’re not seeing that much of a return in the business travel market yet. But at least things aren’t getting worse overall,” Kelly said.
The International Air Transport Association has noted an upward trend as well in its monthly data on international travel.
Global airlines reported a 10.1 percent decline in international travel in January and 11.1 percent in February. But the year-over-decline was only 9.3 percent in May, 7.2 percent in June and 2.9 percent in July, IATA reports.
When IATA released the latest numbers Aug. 27, its director general and CEO noted that average fares and total revenue were still sharply down for airlines.
“Demand may look better,” Giovanni Bisignani said, “but the bottom line has not improved.”