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Cheap fares in the air
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May 25, 2001: 3:24 p.m. ET
Lower fares will benefit travelers, put airline profits under pressure
By Chris Isidore
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NEW YORK (CNNfn) - This weekend marks the start of what is shaping up to be a terrific summer travel season for airline passengers, and a disappointing one for airline investors.
Airlines, scrambling to fill seats in the face of a slowing economy, are offering summer discounts and sales that haven't been seen in recent years.
"I couldn't get the airlines to talk to me last summer," said Tom Parsons, president of Bestfares.com, a discount ticket broker. "This year four airlines have come to me and offered me cheaper fares than I'm quoting."
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Passengers should find lower fares, less delays flying this summer. | |
But these discounts will be coming out of the carriers' already declining bottom line. All but two of the major airlines lost money in the normally difficult first quarter, and while most are expected to return to the black in the current period, the forecasts for the period have been diving lower for weeks.
"The industry has been on sale every single day since the beginning of the year," said Michael Linenberg, analyst with Merrill Lynch, who now sees two of the big three carriers -- United Airline's owner UAL Corp. and Delta Air Lines -- losing money in the current quarter. "At this point in time I think industry will make money, but those numbers are clearly at risk."
The airline's traffic numbers are showing that both the load factor, which represents the percentage of an airline's capacity filled by paying passengers, as well as the average amount paid per mile flown by customers, both fell in April. The Air Transport Association, the industry's trade group, said that led to a 4.5 percent decrease in unit passenger revenue, a key measure of the industry's revenue performance.
AMR Corp. (AMR: Research, Estimates) , the world's largest airline holding company which operates both American Airlines and Trans World Airlines, warned earlier this week it is looking at a 4.2 percent decrease in traffic on American in May compared to a year earlier, and a 14 percent fall in traffic on TWA.
What the lower traffic means for fliers are summer fares much better than year ago pricing, although some of the most lucrative deals such as $198-coast-to-coast round-trips recently ended. But Parsons believes that the eye-popping sales will return, perhaps as soon as the middle of next week.
"This is a bad weekend to be looking for air fares," he said Friday. "If you didn't buy by yesterday, you're already late. But sit back, have cup of coffee and wait, and the right deal should come to you. Once they come back and analyze their loads, there will be a lot of markets that are still soft that they'll offer deals on. They want your greenbacks a lot more than you want to give it to them."
Business travelers looking for savings
The leisure travel is apparently holding up relatively well, but part of that may be a sign that the business travelers who traditionally paid the higher prices are now using the discounted fares, according to both airline industry executives and observers.
"Businesses are pulling back from travel, or they're forcing people to work around to avoid the high, unrestricted fare -- stay over on a Saturday night, that kind of thing," said Jim Higgins, analyst with Credit Suisse First Boston.
Airlines agree with that assessment, but they say that they believe that when the economy starts to turn around, their fortunes will as well.
"Once companies strengthen themselves and become more profitable, they'll do more travel, because that's a way to build their business," said Joe Hopkins, spokesman for United Airlines. "They will start buying more expensive seats that give them more flexibility. I think with a stronger economy, you'll see a return to more traditional booking patterns. But we just don't know when we'll see that."
Because of that uncertainty, UAL has warned that it may post a loss for the year, although at this point it is still hoping a strong second half rescues it from losses in both the first and second quarter.
Delays may also be reduced
Besides finding emptier planes and better pricing, travelers this summer may also see fewer delays in the nation's beleaguered air traffic control system. The Federal Aviation Administration issued a forecast last week saying that changes in some procedures should help reduce air traffic control delays compared to last summer's congestion.
Statistics for March show a 7 percent reduction in overall delays, and the delay per 1,000 landing or takeoffs is down 4 percent. Final statistics aren't available for April, but preliminary figures show a 15 percent decline in delays compared to last year.
The FAA attributes part of that to some new procedures, including training to get air traffic controllers and airline dispatchers to work better with one another and the opening up of some additional air space. The agency won't make any specific forecasts on delays this summer because weather is still the primary cause of delays, but it does believe there will be improvement.
"We're cautiously optimistic that delays will be less than last year," said William Shumann, a FAA spokesman. "Now we can manage delays caused by weather better than we did last year. Last year thunderstorm activity was significantly higher than average. If we get lucky and have a summer with even a normal number, (it) would be an improvement."
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Fewer delays would be good news for both travelers and airlines, as the industry spent a total of $3.7 billion in direct costs due to delays, including additional fuel and payroll costs, according to ATA projections. That's more than the entire $2.6 billion net income the industry reported last year.
But even if the cost of delays improve, the rising cost of new labor contracts are expected to raise industry employment cost by $2 billion to $47 billion this year, according to ATA forecasts.
"There's a market basket of woes we can select from for the industry right now," conceded David Swierenga, chief economist at the ATA. 
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