For Airlines, a Summer of Both Ups and Downs
This summer was supposed to be a travel nightmare for airline passengers that would make last summer’s flight fiascoes pale by comparison. “If you thought last summer was ‘airline hell,’ buckle your seat belts,” the head of Continental Airlines warned only six months ago.
It never happened.
Owing in large part to a stunning falloff in business travel because of the weakening U.S. economy, flight delays are down from a year ago. So are customer complaints. Airports aren’t as congested. Airlines are slashing fares to drum up passengers.
All that is good news for consumers and a needed public relations boost for the beleaguered airlines, whose service has been constantly criticized by passenger advocates, industry analysts and members of Congress.
But the situation also is a disaster for the airlines’ profitability, and the financial turbulence isn’t expected to end any time soon. Indeed, the slump claimed a victim Tuesday when Midway Airlines, a regional carrier based in North Carolina, filed for reorganization under U.S. bankruptcy laws and shut down much of its service.
Business travel “will continue to be soft for at least the latter part of the year,” said Michael Allen, chief operating officer of Back Aviation Solutions, a consulting firm in New Haven, Conn. He said airlines’ business traffic is down by 15% to 20% this year, from a year ago.
That means a host of other industries that rely on business travelers will continue to feel the pressure. Bookings at many hotel chains and rental-car agencies already are soft, crimping their profits.
The fare cuts and reduced delays are welcomed by business and leisure travelers alike. “Let me be the first to congratulate the airlines” for their “winning on-time percentage for June of about 75%” of their flights because “it is warranted,” Terry Trippler, an airline analyst at OneTravel.com, said recently.
But passengers shouldn’t celebrate too much, other analysts said. That’s because the airlines’ mounting losses will mean cuts in the amount carriers spend on customer service--service many consumers and critics still find wanting.
“Certainly there’s less congestion” because planes aren’t as full, but now the airlines “simply don’t have the money it takes to offer a first-class kind of service,” said David Swierenga, chief economist of the Air Transport Assn., the airlines’ trade group in Washington.
The erosion of business travel--which is the most lucrative market segment for the airlines--occurred so fast this year that the ATA has gone from predicting a $1-billion profit for the industry in 2001 to forecasting a loss of $1.5 billion to $2.5 billion, the worst performance in a decade.
The situation could grow even more dire for the airlines. Corporations not only are cutting back travel to pare their costs, they’re also re-thinking their travel strategies and making structural changes that could hurt the carriers for years to come, said Kevin Mitchell, head of the Business Travel Coalition, an advocacy group for business passengers.
With improvements in technology, many companies are embracing conferencing via the Internet, video and telephone to stay in touch with customers and suppliers, rather than flying employees to meet them, he said.
Companies “aren’t just cutting [travel] and waiting for the rebound, so they then can say ‘Let’s get back in the air,’ ” Mitchell said.
That’s not all. Many corporations, annoyed that business fares have surged in recent years while service has deteriorated, are questioning the overall benefits of air travel, Mitchell said.
“There is a backlash here,” he said. “Senior management at a lot of these companies took this economic slowdown to say, ‘Let’s invest a little time and consider how we use travel as a tool and to make some permanent adjustments.’ ”
The sluggish economy isn’t the only thing that prevented another miserable summer of air travel. The weather, a critical factor in last year’s mess, has generally been better this year nationwide. Various strategic moves by the Federal Aviation Administration, such as how it regulates air space and jetliner traffic, also get some credit, analysts said.
UAL Corp.’s plan to buy US Airways Group also was expected to spark a flurry of airline mergers, creating integration problems and disrupting flight schedules. That was one factor that prompted Continental Chairman Gordon Bethune to warn of bigger problems this summer. But that scenario didn’t happen, and UAL recently abandoned the US Airways deal.
Another culprit last year--strained labor relations at some of the giant airlines--also didn’t repeat itself in 2001.
“We’re having a pretty good summer” in terms of on-time performance and other service trends, Rono Dutta, president of UAL’s United Airlines, told reporters Tuesday.
But United also is bleeding red ink--UAL lost $292 million in this year’s second quarter--in part because it signed an expensive new contract with its pilots’ union just as the economy began sinking. The pact came after United’s pilots carried out job actions in protest of the contract talks, actions that were a major contributor to last summer’s widespread delays and cancellations.
United’s mounting losses are a key reason it launched a fare sale last week on flights to popular business destinations. The fares also don’t require a Saturday night stay-over. That was directly aimed at luring more business passengers into the air.
“Corporations have been cutting back on their travel budgets in a pretty major way,” Dutta said. “There’s not much United can do about that.”
Even so, United and other carriers get some credit for helping to reduce delays and airport congestion this summer, said Allen of Back Aviation. United and American--the nation’s largest airline and the major unit of AMR Corp.--both removed seats from many of their aircraft earlier this year. The move was intended not only as a marketing tool the airlines could use to tout more legroom, but also to shrink their number of seats to match the economic slowdown, he said.
“These were some of the moves made preemptively” by the carriers, but few expected the downturn in business demand to be so severe, Allen said.
There’s some hope on the horizon, though. The series of interest rate cuts by the Federal Reserve this year could be setting the stage for an economic rebound early next year, and a subsequent jump in airline traffic. And even though the current fare cuts won’t help the airlines’ profits, they could help the carriers keep their planes nearly full until the economy snaps back.
Since United unveiled its fare sale Thursday, Dutta said, “we’ve seen a pretty pronounced increase in our booking volumes.”
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Something in the Air
After years of mostly gains, the airline industry, hit with a slump in business travel, higher fuel costs and new labor contracts, is expected to show a loss of $1.5 billion to $2.5 billion in 2001....
*
Net profit (in billions)
2001 estimate: about --$2 billion
*
...And U.S. carriers will see a slight decrease in 2001 of the percentage of available seats that are filled with passengers, down to 71.3%*.
Passenger load
2001 estimate: 71.3%
*Estimate
Sources: Air Transport Assn., Salomon Smith Barney
