Airlines see new demand, but hold the applause

A note of optimism crept into major US airline outlooks in the past week with executives trumpeting the first signs of returning demand from well-heeled business travellers who pay full fares and fork over cash for in-flight perks.
But at the same time, they warn that it’s way too soon to declare an industry recovery as a suddenly thrifty Corporate America gropes its way out of a prolonged economic recession and keeps a lid on travel expenses.
Airlines are eager to spotlight evidence of a possible rebound. But for now, the evidence seems largely anecdotal.
“Definitely what we’re hearing is that business travel is coming back, but there aren’t a lot of senses around business travel fares,” said Helane Becker, airline analyst at Jesup & Lamont.
“It’s definitely not at price points that we’ve seen in prior years. And I don’t think we’ll get back to those levels for another year or so,” Becker said. “People are still very price-conscious.”
Third-quarter earnings for major US airlines were mixed as carriers grappled with weak demand, volatile fuel prices and competitive pressures. Fuel prices have eased from their 2008 peaks but they have been inching higher for most of 2009.
Becker said earnings statements were especially troubling when she compared year-to-date airline revenue with fuel cost savings. In almost every case, revenue declines outpaced fuel savings, she said.
For example, Delta Air Lines’ revenue was down $5.3 billion (R41 billion) year-to-date, compared with fuel cost savings of $3.6 billion (R27 billion), Becker said.
“That’s bad,” she said. “There’s no other offset.”
Another airline analyst, Michael Linenberg at Bank of America/Merrill Lynch, noted that while it is true that revenue declines outpaced fuel savings for the first nine months of 2009, the two measures were nearly even in the third quarter.
“By the time you get to the third quarter they’re kind of running neck and neck with some carriers actually benefiting from a bigger fuel decline,” Linenberg said.
“The fact is, you are seeing the inflection point,” he said, adding that it was unclear whether the shift is sustainable.
Airlines shares have been rising since March, and analysts are increasingly bullish. But Becker said the outlook for business travel demand is little reason to buy.
Linenberg, however, said airline shares could benefit greatly if an economic recovery has traction.
“If one believes we’re on the cusp of an economic recovery one of the best ways to play that from an investor perspective is to own transportation stocks,” he said.
Modest trends
“It is not clear that we have got a meaningful and sustained turnaround here, but we have got some modest trends in the right direction,” said Tom Horton, chief financial officer at American Airlines parent AMR Corp, on a conference call last week.
“We have been looking very carefully at demand trends and corporate travel trends in particular, because that is really what has hit the industry so hard this year,” Horton said.
“It appears that corporate traffic bottomed out in the May/June time frame, with a trend since that time being modestly positive off of a low base,” he said.
Continental Airlines’ chief operating officer and incoming chief executive, Jeff Smisek, told Reuters yesterday that it is “incredibly improbable” that business traffic will not rebound at significant levels. But if demand does not return, airlines across the globe will have to downsize, he said.
Airlines base business travel estimates on the number of passengers who pay full fares for their tickets. But that metric has become increasingly irrelevant as more and more fare sales permeate the market, said Scott Kirby, president of US Airways Group, last week on a conference call.
“However, we do have some good anecdotal data that we believe is indicative of business demand,” he said.
Kirby noted that revenue per available seat mile on shuttle flights, which mainly carry business travellers, was down only 5 % in October, compared with the 25 % drop in the second quarter and 16 % drop in the third quarter.
US Airways’ corporate contracted revenue was down 17 % in the third quarter of 2009, compared with 32 % in the second quarter and 31 % in the first, he said.
“So while these statistics alone don’t prove that business demand is recovering or that they’ll stay recovered, there is strong evidence that it is indeed recovering,” Kirby said.
Delta leaders agreed.
“Business traffic is improving more on the domestic side than international, but off of a lower base earlier in the year,” said Delta President Edward Bastian on his company’s recent earnings call.
Bastian said Delta’s corporate contract volume was down about 10 % year-over-year in the third quarter. He said revenue associated with business travel was down 25 %.
“While we’re certainly not happy with the 25 % reduction, this compares favourably to a 40 to 50 % reduction that we were experiencing throughout much of the first half of this year,” he said.