Preview 2010

Travel Weekly's special "Preview 2010" issue offers a variety of views about what lies ahead for the industry.

To read the entire issue, click here.

By Michael Fabey

Count on airlines to be spending most of 2010 scrambling to lure back business travelers, struggling to keep ready cash and trying to remain solvent.

The industry business plan relies on finding more ancillary revenue, filling more planes at higher fares and hoping for a year that's at least a little better than the one they just barely survived.

Airline executives admit that economic indicators and recent booking trends suggest the industry might be leaving the worst of the recession behind. Still, they say, commercial aviation is far from flying in the clear.

Business travel remains grounded. Fuel prices, while nowhere near the spikes of mid-2008, continue to bedevil airlines with their volatility. Prices were hovering around $70 per barrel in late fall, less than half of what they were in mid-2008. But that number had been as high as $80 in October, up from just under $60 in the early spring.

Carriers have padded their coffers with plenty of cash (mostly borrowed) to cushion against roller-coaster fuel prices and passenger fall-offs through the winter and even into the spring. But that money came at a cost.

"Debt is going to be the No. 1 issue," predicted analyst Darryl Jenkins, founder of the Airline Zone, an industry economic website. "The debt owners are going to be the ones who wind up owning the airlines. And then, who knows what will happen?"

On a global scale, IATA says airlines have raised about $17 billion, more than $12 billion of it as debt. Major U.S. airlines raised about $5 billion during the second half of the year, largely by mortgaging parts, gates and aircraft. Analyst Kevin Crissey of UBS predicts the money-hoarding binge will keep the airlines out of bankruptcy until the economy turns around.

Airlines reported some promising trends in December.

Continental, Southwest, JetBlue, Alaska and AirTran all reported traffic gains in November, and four carriers with traffic declines -- Delta, American, United and US Airways -- said the drops were not as deep as in earlier months.

Combined, the major airlines reported an overall traffic increase of 0.2% for the month. They had seen an estimated 9% drop in traffic through the first three quarters of the year, according to the AirlineForecasts consultancy.

Though airlines were cutting capacity over the past several months, traffic drop-offs were outpacing capacity cuts. Now those cuts have begun to level off just as airlines are starting to report much higher load factors.

"The industry has reached equilibrium," said Virgin America CEO David Cush.

Unfortunately, airlines have packed their planes with promotional or deeply discounted tickets. Premium and business fares are still a hard sell. While U.S. airline executives say they are starting to see a slow improvement in business bookings, the consensus is that it will be several months or more before the uptick is meaningful.

Most business flyers now, the airlines say, are booking coach or taking advantage of discounts and upgrades.

"What is not clear at present is the extent to which there has been a structural reduction in premium fares, because business travelers are buying economy tickets or corporate buyers have improved their bargaining position," IATA reported in December.

As a result, carrier yields and revenue are still worrisome for an industry that, globally, is likely to lose about $11 billion in 2009, according to IATA.

Airlines are making up some financial ground with ancillary revenue from charging fees for bags, assigned seats and other services. The carriers plan to look for more ways to unbundle and repackage on a fee basis. Passengers, airline executives say, would rather pay a lower base fare and fees for extras than have those extras included in a higher ticket price.

Even Southwest, which continues to advertise that "Bags fly free," is looking to charge passengers for whatever extra services it can find. "We have an opportunity to sell them more stuff," Southwest CEO Gary Kelly told analysts during the December Next Generation Equity Research investors conference in New York. "It would be nice to sell them stuff that doesn't burn fuel."

But ancillary revenue alone won't make airlines profitable. "What we need is less aggressive fare sales, and we need to be canceling junk fares and adding more surcharges," US Airways CEO Scott Kirby said.

U.S. airlines managed some small fare increases in the latter half of 2009. At the global level, fares have started to creep up from their mid-2009 troughs, IATA reported.

Moreover, analysts say average fares need to do more than rebound to prerecession levels. Average fares, according to the Transportation Department, have seen a gradual decrease over the past decade, from about $340 at the beginning of 2000 to $301 by the second half of this year.

Analyst Vaughn Cordle of AirlineForecasts says the drop has been much more dramatic when airfares are viewed in real dollars. Accounting for inflation, he estimated that fare prices dropped by a bit more than a third over the past decade and a half.

If airfares had kept pace with inflation, the average second-quarter airfare would have been nearly $418, according to the Air Transport Association.

What the industry needs to do is forgo incremental fare increases and get rid of the lower fare bands, Kirby said. While the small increases make the headlines, he said, cutting out the lower bands will have a much bigger impact.

Perhaps the most promising indication that overall U.S. airfares will rise is Southwest's stated readiness to hike ticket prices. Analysts say the biggest reason for lower fares over the last decade was the growth of low-cost carriers in major markets, led by Southwest.

"We still want to continue to be the low-fare brand," Kelly told analysts. But, he added, the airline has to adapt to the economic climate of the times.

"Fares have to adjust," he said. "We are raising fares."

If Southwest follows through, said UBS analyst Crissey, the whole industry will likely do the same.

Click to the next page for the cruise outlook.


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