American Airlines made big news when it filed for bankruptcy in late November, but American’s struggles are not indicative of the health of the overall airline industry in North America, which was very profitable in 2011. That trend will continue in 2012 and for planners, a combination of increased demand and tighter seat capacity will mean higher fares.
It’s business as usual for American during the reorganization process as the company expects to honor tickets and reservations, fly its normal schedules, and continue its frequent-flyer program. Until now, American was the only major North American carrier not to file bankruptcy since September 11, 2001.
“We took this action in order to achieve a cost and debt structure that is industry competitive and thereby assure our long-term viability and ability to continue delivering a world-class travel experience for customers,” company officials said in a statement. American Airlines lost $2.7 billion in the past year while its competitors posted profits, ABC News reported this month.
According to the International Air Transport Association, North American carriers generated a total of $2 billion in profits in 2011, which exceeded projections. For 2012, all major North American carriers except American are expected to post profits in 2012, with total profits estimated to be $1.7 billion, noted The Wall Street Journal’s Marketwatch.
Experts have cited tight seating capacity management as one of the keys to success. “Generally, airlines have not been over-hasty in restoring capacity since the depths of the last recession,” according to a statement from Advito, the consulting and research arm of BCD Travel, Atlanta. “The world’s airlines have generally resisted the temptation to respond to the upward economic cycle since early 2010 with over-enthusiastic capacity expansion. This was not the case in previous cycles, when carriers would all too often focus on market-share gains.”
Seating capacity will reduce even further in 2012, especially at American, which will likely terminate less-profitable routes, according to the Marketwatch article. “Given their new-found commitment to profitability, airlines have started to respond with announcements of reduced capacity increases, and in some cases outright cuts. A 5 percent to 6 percent reduction on some routes is not out of the question,” said Advito analysts.
So what does this mean for business and meeting travelers? Airfares will climb, according to industry projections. Business-class airfares may increase the most in 2012 due to a combination of an expected increase in business travel and tightening seat capacity. Short-haul business airfares are anticipated to rise 5 percent to 7 percent in 2012, while long-haul business fares will likely increase 3 percent to 5 percent.
Projections for short-haul economy-class airfares show fares climbing 2 percent to 5 percent, with long-haul rates rising up to 3.5 percent. Airfare increases in Europe are expected to be similar to those in North America. However, airfares in Latin America and Asia-Pacific, where economies are growing faster, will rise significantly. Long-haul business fares will climb 5 percent to 8 percent in Latin America and 8 percent to 10 percent in Asia-Pacific.
”As more and more companies understand the importance of putting people on the road and its criticality to converting prospects, retaining clients, and ultimately driving growth, particularly in emerging nations, we expect to see travel prices go up,” said Christa Degnan Manning, director of eXpert insights and research, American Express Business Travel, New York, N.Y.
In its 2012 Industry Forecast, Advito cautioned travel buyers and managers to be wary of over-commitment during airline negotiations because carriers have generally aligned capacity neatly to demand and will react unfavorably. Advito analysts also encourage buyers to negotiate hard in markets where there is over-capacity in order to compensate for limited opportunities elsewhere. There are pockets of over-capacity, particularly in trans-Atlantic markets, according to Advito. Buyers should also encourage travelers to book further ahead.
Fuel surcharges are not anticipated to rise any further as average per barrel oil prices are expected to stabilize through 2012, Advito stated, citing International Monetary Fund projections. But if oil prices do rise, so will airfares. Advito research found that every $10 rise in the price of a barrel of oil pushes up the total air ticket price by around 3 percent.
Finally, Advito says that airlines will continue to experiment with what they can unbundle—and charge for unbundled services, such as bag fees. There may be different fees for different passenger types, like reductions in bag fees for frequent flyers.