Hard to believe that just a few years ago U.S. airlines were enjoying record revenues. This year is expected to be the worst in aviation history, with U.S. carriers losing a record $6 billion, according to the International Air Transport Association. As we went to press, United Airlines had announced the layoff of another 9,000 employees — part of an effort to stave off bankruptcy for the nation's second-biggest carrier. US Airways is currently reorganizing under bankruptcy protection, and Delta Air Lines has lost nearly a quarter of its workforce since September 11, 2001.
Meanwhile, passenger traffic on major carriers is projected to decline 10 percent this year, according to report released in November by the National Business Travel Association. A drop in demand and too-high operational costs aren't the only challenges facing airlines next year: Another war in the Persian Gulf would not only drop demand drastically but could raise fuel prices (at least in the short term).
Besides layoffs, airlines are trying a variety of strategies to staunch the flow of red ink. American announced in November that it would cut scheduled flights by 3.3 percent for the first quarter of next year. Airlines have also cut back onboard service, eliminated travel agent commissions, and imposed more restrictive ticketing policies. (See sidebar, next page.)
The NBTA is projecting a 7 percent increase in business fares next year to an average $1,179 round trip (about six times as high as the average leisure travel fare). But perhaps the increase in business travel fares will not be that high. Some carriers are also experimenting with lowering sky-high business-class airfares — a move designed to win back business travelers who have started shopping for discount fares or who have simply cut back on travel. A November 22 article in The Wall Street Journal reported that Delta, without any announcement, has cut business fares by about 21 percent in 400 small markets — a move resulting in a double-digit increase in revenue for the airlines.
Northwest and Continental have also experimented with cheaper fares aimed at business travelers, according to the article. American Airlines cut business fares while raising leisure fares in 23 markets and is expected to push out this new structure nationwide.
IF YOU CAN'T BEAT ‘EM
Low-cost carriers have not suffered the trauma that the majors have. Southwest Airlines and JetBlue are now the two most profitable U.S. airlines. Air Tran, Atlantic Coast Airlines, and easyJet have embraced the Southwest model with great success, and low-fare airlines now carry one-fifth of all U.S. passengers. That percentage is expected to increase dramatically in the next few years.
Delta Air Lines, the nation's third largest carrier, announced in November the launch of its own as yet unnamed low-fare subsidiary in 2003. It will initially operate in the Northeast/Florida market using a fleet of Boeing 757s. All fares will be one-way, nonrefundable with no Saturday night stayover required. The new airline will eventually replace Delta Express, which the company said had not effectively competed with existing low-fare carriers.
“We've listened to our customers and we know what they want — low fares and better value,” said Frederick W. Reid, Delta's president, in a news report on EyeforTravel, a travel Web site. “Our research shows that more than 70 percent of customers make their purchase decision almost exclusively on price.”
CREATING A PROBLEM
Analysts point out that the airlines' revenue woes are partially of their own making, at least to the extent that they have offered Web fares that are radically lower than business fares. Airlines wanted to cut their distribution costs by eliminating travel agents through the sale of Web fares, but the differential between online fares and business travel fares became so great that business travelers balked and began shopping for discount fares. The upshot? Airlines lost revenue.
The elimination of travel agent commissions also fundamentally restructured the way many corporations book travel, causing a huge shift toward online travel booking systems.
In late September, Hal Rosenbluth, chairman and CEO of Rosenbluth International, one of the country's largest travel agencies, submitted a White Paper detailing a “Fair Fare Plan” as part of his testimony before the U.S. Senate Committee on Commerce, Science, and Transportation. “The corporate pricing structure of the airlines is broken,” Rosenbluth wrote. “Airlines won't publicly state that they are in a mess they can't get out of, yet privately, they are quick to agree that ‘lemming pricing’ has ruled the day for the past two years.”
Rosenbluth calls on airlines to reduce walk-up fares while simultaneously reducing corporate discount programs. He notes that airlines often maintain corporate discount programs even when a corporation fails to meet its volume or market share goals. He calls for closer monitoring so that those who do perform aren't subsidizing those who don't.
It remains to be seen what the long-term effects of airlines' strategic changes will have on. It's certainly true that air has always an integral part of site selection, but with less flexibility, increasing costs, lack of enough lift, and declining service, air travel has become a much more influential factor for association meetings than ever before.
*Alison Hall helped report this article.
The Old Rules Don't Apply
Air travelers are feeling squeezed by new fare restrictions announced by the major carriers over the past few months, especially business travelers.
“Airlines are responding to their financial crisis on the backs of their best customers, as opposed to stepping up to the really tough cost and productivity problems they have ignored for decades,” says Kevin Mitchell, chairman of the Business Travel Coalition, a Radnor, Pa.-based advocacy organization representing the interests of customers of the business travel industry.
“There never will be a day where everyone will be satisfied completely, but we've tried to strike a balance,” says David Castelveter, spokesman for US Airways in Arlington, Va. US Airways was the first to announce several changes in fees and restrictions, most of which were quickly matched by the other majors. The changes, Castelveter notes, will represent “tens of millions of dollars in new revenue streams annually.”
The bottom line is a major motivation for Northwest Airlines as well. “With 2002 expenses and 1996-level revenue, we are examining every area of our business,” says Kurt Ebenhoch, spokesman for the Minneapolis-based carrier.
Here's a summary of recent changes in airline ticketing policies:
You can't reuse nonrefundable tickets if you fail to travel on your original travel date. The exceptions: You can rebook before your original travel date for a $100 fee, and you can travel standby on your original travel date for a $100 fee. (Northwest charges no standby fee.)
If you rely on nonrefundable tickets to keep your group's budget in line, you face a decision: Should you continue to buy the cheaper nonrefundables and risk losing all of their value (or paying $100 to salvage them) or spend more at the outset and buy tickets in less-restrictive fare categories?
The major airlines have eliminated the lowest-fare bucket from their corporate discount programs.
Companies that book enough air travel can negotiatewith the major airlines based on that volume. Those contracts get them discounts off published fares, which until recently included the lowest fares available. These “corporate fares” are used for individual business travel and for group travel.
The major airlines have outlawed “waivers and favors.”
Up to now, the airlines had tried to smooth out the fare fluctuations for their customers. Say, for example, your travel agent found a low fare in the morning for one of your attendees, went back to book the ticket after lunch, and discovered that the fare had gone up. It used to be that the agent could call the local airline rep, get a waiver code, and pay the morning's lower fare. No more, say the airlines.
— Alison Hall