It's payback time.
In a startling change of behavior, business travelers are mounting a rebellion that could reshape the way the airline industry operates for years to come. Fed up with spiraling fares and mediocre service, road warriors are using technology and other means to beat the system airlines have long stacked against them.
The last thing the carriers need right now is to lose their most profitable passengers. After years of bottom-line growth, the airline industry suddenly finds that everything seems to be going wrong. First, jet-fuel prices skyrocketed. Then, the long economic expansion that sent business and leisure fliers jetting around the globe stalled. And now, labor costs are going up just when the airlines need to keep them in check.
The result: Caught in a vise between rising costs and falling revenue, the U.S. airline industry is careening toward an estimated $2 billion to $2.5 billion loss for 2001, ending a six-year profit streak.
Spooked by the faltering economy, fliers who long seemed indifferent to high ticket prices are scouting for cheap fares, shuffling travel plans or staying home. The first quarter of 2001 marked the biggest drop ever recorded in the percentage of full-price coach and first-class tickets booked on a large sampling of routes tracked by American Express Travel Related Services since 1992. The percentage of passengers paying full-fare coach fell to 7 percent from 12 percent a year earlier. Those buying first-class tickets dropped to 2 percent from 3 percent.
"None of us has ever seen this kind of collapse in business travel," says Doug Hacker, chief financial officer of UAL Corp., the parent of No. 2 United Airlines.
The loss of those high-priced seats is taking a toll on the carriers' bottom lines. In May, domestic unit revenue, a closely watched indicator that measures revenue per available seat mile, plunged 11.8 percent from a year earlier among U.S. carriers — the biggest monthly decline in two decades. June and July proved even worse, with drops of more than 12 percent in both months. In a survey of 200 companies earlier this month, the National Business Travel Association found that only 16 percent plan to boost travel spending next year.
The new mentality among business travelers suggests the airlines milked their profit cow too hard. And just as computer technology let airlines precisely match prices to demand and seat inventory to squeeze the most from passengers, it's now equipping travelers with tools to buy smarter and save money — threatening airlines' pricing power.
Leading the consumer revolt are frequent fliers such as Dr. Neil Butani, a Los Angeles physician working on a start-up medical publisher. For a trip to Chicago earlier this year, he bid $168 on Priceline.com and ended up with a $198 round-trip ticket just one day before his departure. With empty seats to fill, American Airlines charged him one-tenth the normal walk-up fare.
Butani normally flies no-frills carrier Southwest Airlines. "But when you can get this fare for a nonstop, you take it," he says.
"Anybody who has a modicum of Internet capability and wants to take what is now a modest amount of time can very rapidly find out and comparison shop," says Leo F. Mullin, chairman and chief executive of Delta Air Lines. "There is almost perfect information out there."
Michael Guirlinger, a senior managing director for Profit Technologies, a Davidson, N.C., consulting firm, says he routinely researches trips on the Web to find the best fare before booking through an agent.
Travel agents, he says, might not ferret out combinations that have one or two extra legs but save a lot of money. For a trip next week between Columbus, Ohio, and Dallas, Guirlinger checked several airline Web sites and found that a nonstop flight cost $1,300, but going via Atlanta was "nearly $500 less," he says. "That's a lot of money. And when you travel as much as our firm does, it adds up." He says when the economy rebounds, he expects he and other frequent fliers at the firm will maintain such price sensitivity.
The airlines' pricing strategy over the past five years has made them an easy target. Cocky that business travelers needed to fly no matter what, the big carriers aggressively pushed up business fares — six times during 2000 alone. Meanwhile, they held flat or even reduced discount fares, mostly used by leisure travelers.
By the second quarter of 2001, the typical business fare had climbed to 4.91 times the price of the lowest discount fare, compared with 2.61 times in the first quarter of 1996. That's the widest gap ever between ticket prices, according to American Express Travel Related Services.
The Air Transport Association, an industry trade group, estimates business travelers take about half of all airline trips but generate as much as 65 percent of carriers' revenue. Full-fare business travelers are far more lucrative to the carriers than that: United, during the boom times in the late 1990s, figured 9 percent of its passengers accounted for 46 percent of its revenue.
During the recent go-go economy, the strategy worked. Fare increases didn't dent demand for business seats, as euphoric dot-com executives and high-tech consultants roamed the country. Carriers boosted their yields and reaped record profits.
But as companies and individual fliers scrutinize spending in the weak economy, the yawning gap between business and leisure fares makes the cost of a business-class seat seem more irrational and unfair than ever. "Why should a seat be twice as expensive five days out than a seat purchased 14 days out?" asks Dennis Kivikko, a frequent traveler and official with the garment division of the AFL-CIO. "Their primary mission is to gouge the business traveler."
Many observers think the changes may be here to stay. "We're increasingly thinking 2000 and 1999 were business travel bubbles that aren't going to be duplicated any time soon," says Jim Higgins, an airline analyst with Credit Suisse First Boston in New York. "As that bubble has burst, it has revealed an inherently unstable pricing situation in the industry," Higgins says. "The implication is that business travelers may be in the process of retraining themselves as to what they are willing to pay for business travel tickets."
Meanwhile, more travelers are getting used to high-tech alternatives to travel, such as online meetings and videoconferences. "Travelers are learning this stuff works," says Scott Gillespie, chief executive officer of Travel Analytics, a Solon, Ohio, concern that analyzes corporate-travel patterns for companies negotiating airline contracts. "I don't get frequent-flier miles, but at least I get to see my wife at night." He predicts a sizable portion of air travel won't rebound when the economy does. "It's going to peel away the marginal travel," he says.
Contributing: Melanie Trottman
Via The Associated Press