Business Travel Slump Still Hurts Airlines

Despite heavy leisure travel over Thanksgiving week, U.S. airlines remain troubled by a persistent slump in business travel--which isn’t expected to rebound until the ailing economy improves, industry executives and analysts said Tuesday.

Although airports and planes were crowded with holiday travelers last week, most of those passengers were flying to see family and friends on fares that the airlines heavily discounted just to fill their planes.

What the airlines really need to stem their massive losses are more business travelers paying heftier prices. But too many of those once-frequent fliers are still on the ground because of the economy, and no improvement is expected until sometime next year, analysts said.

The scarcity of empty seats last weekend was hardly a sign of an industry recovery because the airlines are providing 15% to 20% fewer seats than at this time last year. After Sept. 11, most carriers slashed their operations and laid off tens of thousands of workers to conserve cash and adapt to the plunge in passenger traffic that followed the attacks.

“The evidence of October and the first few weeks of November is confirming that we don’t see any significant recovery in traffic,” Graham Atkinson, vice president for international operations at UAL Corp.’s United Airlines, told reporters in London.

Business fliers generate most of an airline’s income because they typically pay higher fares in exchange for choosing flights with less advance notice than leisure fliers. But amid the economy’s slide into recession and many employees’ skittishness about flying after Sept. 11, business travel is down about 20% to 30% from a year ago.

“With the economy not showing any signs of an immediate recovery, it is quite hard to be optimistic about a prompt rebound in business traffic,” said Reno Bianchi, an analyst at Salomon Smith Barney Inc. in New York.

That’s why AMR Corp.’s American Airlines, for example, says it’s still losing $10 million a day, even though its airplanes are more crowded. Most other major carriers also are still operating in the red, and there is “little prospect of the industry earning a profit for at least the next three quarters,” analyst Raymond Neidl of the investment firm ABN Amro Inc. in New York said in a note to clients Tuesday.

The industry--which lost $2.4billion in the quarter ended Sept. 30--is expected to lose at least that much in the current quarter, giving it a total 2001 loss of $6.5 billion to $7 billion, analysts estimate.

The airlines scored a small victory last weekend by moving Thanksgiving crowds through all the new security checks with little incident, which could bolster confidence in the system among business travelers who need to get through airports in a hurry.

But financially, the airlines’ high load factors over Thanksgiving (that is, the percentage of their seats that were filled) were “largely irrelevant” because the crowds masked the lack of business travelers, said Kevin Mitchell, chairman of the Business Travel Coalition, an advocacy group.

Profit May Suffer Despite Full Planes

United’s Atkinson confirmed that. “On the Sunday of the Thanksgiving weekend we were flying ... near full, but even that may not have been positive in terms of profit because of the fare-discounting and the low proportion of business travelers,” he told Bloomberg News.

Besides the slumping economy, business flying is still inhibited by fear--not of another hijacking but “of being stranded either inside or outside the country” because of some other terrorist incident, Mitchell said. And the security-related lines at airports are “another natural deterrent” to business travelers who fly frequent short-haul flights, he added.

Phil Condit, chairman of aircraft maker Boeing Co., cited those problems Tuesday in saying it might be more than three years before U.S. air travel returns to pre-Sept. 11 levels.

“There is a segment of the population that has clearly decided they are not going to fly right now,” Condit told business leaders in Chicago. “It is not economically driven and cannot be changed by economic incentives.”

The passage of a new aviation-security law this month is expected to alleviate some of the travelers’ concerns. The plunge in jet fuel prices also has helped the airlines, and it is a key reason airline stock prices had rebounded sharply from very depressed lows in the last two weeks.

But the stocks fell Tuesday as investors speculated that the decline in fuel prices might be near a bottom. The American Stock Exchange’s index of airline stocks dropped 2.13 points to 89.64. Also, most major airlines plan to maintain a fuel surcharge of $20 on each one-way ticket even though the price of jet fuel has dropped by half during the last year.

Despite Condit’s comments, the economy is still a major force behind the slowdown in business travel, just as it was before Sept. 11 when the airline industry already was starting to bleed red ink.

With their own operations struggling, many businesses started paring their travel budgets a year ago to save money, relying more on videoconferencing and other tools to communicate with customers.

At American Express Co., for example, the company is maintaining “a general guidance that business travel should have a strong purpose” to be approved, said Melissa Abernathy, a spokeswoman for the company’s travel-services division, itself a major provider of travel management for other corporations.

Indeed, a survey of companies earlier this month by Equation Research showed two-thirds of the firms had further reduced their travel spending for the current quarter. Also, one-fifth of the companies said they would spend less on travel in 2002 than they did this year.

All of which is making it hard for airlines to raise business fares. Prices for business flights will rise only 3% in 2002--to an average of $1,102 for a round-trip ticket--after climbing an average of 8% in each of the last five years, according to the National Business Travel Assn., which represents 2,400 corporate travel managers and travel service providers.

Revenues Only 55%

of Normal Levels

That’s hobbling the airlines’ ability to increase revenues enough to offset their fixed costs, which include labor and financing, in addition to fuel. “We estimate that current revenues are about 55% of normal levels year over year,” said Neidl of ABN Amro.

So, until the economy improves, the airlines mostly must try to keep a tighter rein on costs. “At the end of the day, business traffic is highly correlated to underlying economic trends,” Bianchi said. “There’s not a lot the airlines can do to change that.”

European airlines are faring no better. Their international traffic in the week ended Nov. 18 fell 18.6% from a year earlier, reversing a moderate recovery after Sept. 11, the Assn. of European Airlines said. Their North Atlantic travel was particularly weak, dropping 30.5% from a year ago.

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Times wire services were used in compiling this report.