On a scale of one to five, with five being very dire, aviation industry analyst Darryl Jenkins rates the current health of the U.S. airline industry at about a 10 or 12.
“I've never, in my 30 years in the industry, seen anything nearly as bad as what we're going through now,” says Jenkins, director of The Aviation Institute at George Washington University, Washington, D.C. “We don't see a letup in the short term, and we're not sure that it won't get worse.”
How much worse could it get? The year 2000 was a high-water mark for air travel. Today, traffic is 10 percent below that level, according to a spokesperson for the Air Transport Association, a trade organization for the principal U.S. airlines. And with the aftereffects of war and ongoing concerns about SARS, travel demand is not likely to improve, even during peak season this summer.
In response to low demand, airlines are scheduling fewer flights, reducing capacity by flying smaller aircraft, negotiating wage concessions to cut labor costs, and slashing ticket prices to a level not seen since 1987.
In an effort to stimulate demand, major carriers have dropped walk-up fares by as much as 40 percent, according to Jenkins. The result: less revenue but not more traffic. “It will take price cuts in excess of 40 percent,” he says. “Right now, you can't justify that, given the current cost structure.”
Jenkins predicts that the only way to bring air carrier supply and passenger demand into balance — short of liquidating a major carrier — is to reduce capacity and eliminate the lowest tier of fares. If the number of seats is more in line with the number of travelers, carriers won't need deep discounts to sell the last seat.
“Within 12 to 18 months, I think we'll see a new pricing structure,” he says.
Meanwhile, group travel fares will not change much, primarily because discount fares for meeting and incentive travel are still more profitable than discount leisure fares.
“A good meeting and convention fare is about 50 percent off,” Jenkins says. “A discount fare for leisure travelers is … 70 [percent] to 80 percent off.”
The more meetings and conventions there are, the more passengers there will be for air carriers. Planners will be able to leverage their position by negotiating favorable group rates. What they won't be able to negotiate are the frequency and capacity of flights for their destinations.
During a typical week in April, for example, carriers operated 12 percent fewer flights in 2003 than in that same week in 2001, according to figures from OAG, which maintains a flight schedule database for more than 930 airlines worldwide.
Until supply and demand are in balance, carriers will continue to cut back service to second- and third-tier cities, schedule fewer flights in and out of major hubs, and fly regional jets instead of jumbos. But as long as meeting business remains strong to a city, air service is likely to continue to that city.
“We're in business to carry as many passengers as we can,” the ATA spokesperson says. “As long as there are passengers, we want to provide flights. If there are no passengers, we won't fly empty planes.”
Thanks to $3 billion in government aid — relief from a tax collected to pay for federal security at airports — carriers in financial distress or bankruptcy are expected to stay airborne. But only an economic recovery will help the airline industry regain its health.
“A robust economy is an airline's best friend,” Jenkins says. “Until we get a good, robust economy rolling again, you're going to see everybody on the skids.”