"NBTA Sees Business Airfares Jumping 7% Next Year"

Monday, November 4, 2002

NBTA Sees Business Airfares Jumping 7% Next Year 
Airline Financial News


A new forecast by the National Business Travel Association (NBTA)
predicts business airfares will increase 7 percent next year, which
would be relatively good news for the beleaguered airline industry. It
goes on to say, however, that the airline industry could find itself in
"merciless turmoil" if things don't break its way. The forecast also
says that new customer restrictions by six major airlines could
backfire, causing "While industry forecasts predict a 3-4 percent
increase in typical business fares, NBTA predicts the average fare paid
by corporations will increase on the average 7%," the forecast says.
"Beyond fare movement, other factors will play a role in actual air
costs in 2003, including industry bankruptcies, future alliances,
contract models and possible fare reform. Corporations will discourage
any use of nonrefundable fares to minimize financial loss." 

The analysis, the 2003 Business Travel Cost Forecast, says overall
business travel costs are likely to jump 5 percent next year. The annual
report says that hotel rates will likely jump 2 percent and that
corporate car rental rates will increase 2 percent. 

U.S. airlines lost $6.2 billion last year after the Sept. 11 terrorist
attacks cut into already-anemic travel demand and increased security and
insurance costs. The forecast says that industry losses through 2003
will be significantly worse than they previously expected, with profits
unlikely until 2005. In addition, a second Persian Gulf conflict could
also further damage the industry's health. In the early 1990s, high jet
fuel prices due to Iraq's invasion of Kuwait created losses of about $10
billion, according to NBTA. All major U.S. airlines except Southwest
Airlines [LUV] reported losses during those years. In addition, several
airlines - notably Eastern and Pan Am - went out of business, and TWA,
Northwest Airlines [NWAC] and Continental Airlines [CAL] entered
bankruptcy proceedings. 

"A combination of high fuel prices, a war induced travel slow-down, high
insurance costs born out of 9-11 and an already unstable airline
industry could place the industry in merciless turmoil," NBTA says.
"Average fares paid by corporations will vary based on the benchmark of
their own corporate deals and use of discounted fare categories." 

Six major airlines recently introduced new restrictions on
non-refundable tickets, making them unusable after the ticketed date and
adding fees for flight changes. This is an attempt to transfer the cost
of no-show travelers to the customers themselves. But NBTA says some
specialists believe the new rules may backfire, prompting a drop in
business travel demand. Corporations estimate that the new rules would
result in a roughly 20 percent increase in the average corporate airfare
and thus would force them to cut travel even more. Some analysts say the
rule changes would be a boon for low-fare carriers that have not
embraced the new restrictions. 

Despite the tremendous slump in the airline industry as a whole, some
alternative carriers have done quite well. Low-cost or low-fare airlines
such as Southwest, Frontier Airlines [FRNT], JetBlue Airways [JBLU], and
Airtran Holdings [AAI] have been benefiting from a favorable market
shift and have outperformed the major traditional airlines during the
industry slowdown. Both passenger traffic and capacity of this industry
sector increased over the year, as travelers grew more price-cautious
and troubled traditional airlines pulled out from some markets. For
Southwest, the biggest low-cost carrier, the August year-to-date
passenger traffic fell only 0.2 percent from the same period of the year
before. At the same time, the carrier has expanded its capacity by 4
percent. 

Airtran and Frontier also report very successful performance. Airtran's
passenger traffic is up 15 percent and capacity has increased by 19
percent for that period. The numbers for Frontier are respectively 17
percent and 11 percent. JetBlue, the carrier showing superior
performance for the year, reports a record increase in year-to date
passenger traffic of 112 percent and a capacity expansion of 104
percent. 

Competing fiercely, low-cost carriers are coming in where troubled
traditional airlines are pulling out. Currently, these discount carriers
account for more than 23 percent of all seats on domestic flights, with
some predicting a 50 percent market share in five years, according to
NBTA. These carriers have also made strategic inroads into the largest
metropolitan areas and major airports. They now account for at least 20
percent of domestic seats in six major metro areas. Furthermore, they
have been luring part of the lucrative business travel market through
successful pricing strategies and improved service. 

Numbers reported by the traditional airlines are in high contrast with
the excellent performance of the low-cost or low-fare carriers. US
Airways [U], for example, reports a decline of 17 percent in passenger
traffic and a drop of 18 percent in capacity for the period. For United,
both traffic and capacity have shrunk by 13 percent, for American by 9
percent, while Continental shows a drop of 10 percent and 11 percent,
respectively.


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