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airline focus on summer peak 2009/03/31

Filed under: US REAL ECONOMY — rogerwang2046 @ 03:44

Airline executives have little more to go on than a feeling, but based on very preliminary numbers, they’re expecting ticket sales to climb as the summer travel season approaches. That could mean that after several months of fare declines, prices will reverse and begin rising for the summer months as newly confident consumers book summer trips.

From mid-February on, bookings have improved, said Scott Kirby, president of US Airways Group Inc. Sales are still worse than a year ago, “but things seemed to bottom in February, at least in the near term,” Mr. Kirby said. “Hopefully we’ve seen the worst of it.”

Bookings had dried up dramatically in January, prompting carriers to launch massive fare sales, some offering fares as low as $99 to fly across the country with little advance purchase. Last month, average domestic fares were about 8.7% lower than a year earlier, and fares to Europe fell by more than 10%, according to the Air Transport Association.

Airlines also blitzed travelers with special deals on top of low fares, from double and even triple elite-qualifying miles for frequent fliers, to JetBlue’s promise — similar to those made by some car companies — of a full refund if a customer is laid off before a trip.

Those deals appear to have worked, at least somewhat, as carriers report an uptick in domestic bookings for April. While spring break travel was weak, some consumers seem willing to plan trips to see family and friends over the Easter and Passover holidays in April, seeing those travels as more of a necessity than an optional vacation.

“As we get into the holiday periods we are starting to see some traction,” said David Barger, chairman and chief executive of JetBlue Airways Group Inc.

Mr. Barger, like other airline executives, expects full planes this summer. But carriers don’t yet know what kind of pricing power they’ll have in the coming months. It may be planes can only be filled at bargain-basement prices. Or rebounding demand could make seats more precious.

“I think we’re going to see our traditional strong summer traffic,” he says. “The question is going to be, at what price?”

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Thousands of passengers pass through the United Airlines hub at Chicago’s O’Hare airport during the busy summer travel season.

Of course, calling a bottom to the recession is risky business at this point. Another unexpected blow or two to consumer confidence, and the downward slide in air travel could resume. If it does, airlines are strangely well-positioned to continue offering lower fares and even eke out small profits this year.

Last summer’s oil-price shock forced airlines to ground so many planes that when demand plunged from business and leisure travelers, airlines had already significantly reduced capacity.

“The fact that many carriers are projecting even the prospect of profits this year says a ton about the extent of the capacity cuts they’ve made and the success of steps they’ve taken in the last 12 months,” said John Heimlich, chief economist for the Air Transport Association.

Just consider baggage fees, which alone may swing some airlines to profitability this year.

At US Airways, baggage fees and other “ancillary revenue” initiatives are expected to amount to an added $400 million to $500 million in extra revenue in 2009 — as much as the company has ever earned in its best year. At UAL Corp.’s United Airlines, total ancillary revenue, mostly “Economy Plus” coach seating and baggage fees, will be $1.2 billion this year. That’s more than United’s cargo division will bring in, and enough to pay more than one-quarter of the company’s payroll.

For many airlines, an uptick in consumer demand is only part of the economic story. Business travel has dropped off sharply, as many corporations restrict travel and reduce business activity — fewer deals to close or projects to launch. In addition, many who are still traveling have traded down, refusing to buy high-dollar first-class or business-class tickets and riding in coach instead.

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International carriers that rely heavily on high-dollar corporate customers are suffering more heavily now than airlines that focus more on domestic travel and low-fare passengers.

“We’ve seen businesses once again, especially big businesses, focus on the travel budget as one of the most visible items in the budget,” said Glenn Tilton, chairman and CEO of UAL and United. “So our big corporate clients are clearly reducing their travel.”

If demand does pick up as some executives are predicting, airlines will enjoy renewed pricing power because of their capacity reductions.

Airline executives note that they do not yet have a good read on summer traffic. Few tickets have been sold for the busiest travel season of the year, airlines say. US Airways says only 20% of its seats have been sold for May, giving the airline only sparse data on what to expect this summer.

But even at the biggest U.S. airlines, there are signs of improving domestic demand, at least in spring.

While economic conditions vary market-to-market, “domestic markets are showing more signs of some sense of economic optimism than foreign markets are,” said Mr. Tilton.

Still, business travelers are not likely to return until the broader economy gains steam, meaning continued pain for many airlines — but cheap tickets for many consumers.



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