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Inflation is Low, Growth is 2% (nowhere near
a recession)

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They [BA] are basically a civil service type operation with practices dating back to the 1960s

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Maybe the government will bail them out, or maybe it will be politically advantageous to allow them to fold in an attempt to demonstrate the folly of privatisation

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August 28, 2001

High Fares, Mediocre Service Cause Business Travelers to Mount Rebellion

By Martha Brannigan, Susan Carey and Scott McCartney
Staff Reporters of The Wall Street Journal

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% from 12% a year earlier. Those buying first-class tickets dropped to 2% from 3%.

"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% 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% in both months. In a survey of 200 companies earlier this month, the National Business Travel Association found that only 16% plan to boost travel spending next year.

New Tools

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 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 (www.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.

Dr. 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."

Checking Your Agent

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, Mr. 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.

At Intel Corp., employees using a new online booking program linked to its corporate travel department have turned into bargain-hunters. As travelers scroll down a computer screen and see they can often save several hundred dollars by shifting to an earlier or later flight, many have become more willing to do so. The big chipmaker slashed travel spending 25% in the second quarter from a year earlier with such measures, as well as handling more meetings by phone and videoconferencing. And even senior executives at Intel are booking coach tickets between the U.S. and Asia.

Robert Africk, head of investment banking at Blaylock & Partners L.P. in New York, had long been among the travelers who flew "any time, any price." That changed when he saw the price of a full-fare ticket between New York and Houston, a route he travels often, double to more than $2,000. "Several flights go through Houston to Cancun, and the guy going all the way pays significantly less," he says. "That doesn't make any sense."

With air fares soaring and business softening, Mr. Africk began focusing on booking ahead whenever possible, hunting for
bargain fares and buying restricted tickets. "Travel and entertainment so overwhelm other expenses, it's really the place where you can make a difference," he says.

Royal Cutbacks

Royal Caribbean Cruises Ltd. cut its own corporate-travel spending by 28% in the first half of 2001 from a year earlier by forcing many employees to forgo first-class and business-class seats in favor of economy class -- even on long international flights. The cruise giant is dispatching fewer employees to meetings, and those who do fly are urged to book well ahead to get cheap fares.

"We're not paying those $2,000 and $4,000 tickets anymore," says Nick Hafner, a Royal Caribbean vice president who manages corporate travel. "We're paying the $400 tickets. It's a pretty dramatic change." While Royal Caribbean's employees miss the first-class and business-class seats, "my expectation is probably it will not come back," he says.

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.

Lucrative Customers

The Air Transport Association, an industry trade group, estimates business travelers take about half of all airline trips but generate as much as 65% 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% of its passengers accounted for 46% 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."

Unstable Situation

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," Mr. 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.

Pushing for Discounts

Many corporate travel managers say they have begun pushing for bigger percentage discounts from full-fare in negotiations with carriers. Full-fare coach, says Harlan Bennett, vice president of revenue management at Delta, has become like the rack rate posted on the back of a hotel door. It's the standard used for cutting deals, but the percentage of travelers paying it has fallen to "the single digits."

Also tipping the scales toward the buyer are sophisticated software systems that crunch data on employees' travel patterns to ensure they stick to travel rules and to use as leverage in negotiating discounts with airlines. In-house travel managers now also use software that distributes employee travel among carriers to meet volume targets for negotiated discounts.

"I doubt we'll see the high margins of the late 1990s in the next upturn," says Philip Baggaley, an analyst with Standard & Poor's Corp.

Not Permanent

Many airline executives dispute the suggestion that a permanent shift in business travel is under way. Some recall similar dire predictions that air travel wouldn't rebound after the recession and a widespread fear of terrorism in the early 1990s temporarily curtailed demand.

Doug Steenland, Northwest Airlines' president, expects a revival in last-minute business bookings when the economy rebounds. "The time of our corporate customer is as valuable today as it was before," he says.

"The memo never comes out saying start traveling again," says M. Michele Burns, executive vice president and chief financial
officer at Delta. "But it just happens."

In the meantime, the major airlines are slashing capital expenditures, freezing hiring, and paring capacity to shed unprofitable routes and ground older, fuel-guzzling planes. The double-whammy of higher labor costs and lower business travel
is "going to mean a rebalancing of supply and demand in the industry," says Tom Horton, chief financial officer at American.

Last month, Northwest announced a second round of layoffs, a move likely to spread to other carriers. Earlier this month, American lowered the cap on the commissions it pays travel agents to $20 from $50 for a domestic round-trip ticket and to $10 from $25 for one-way. The move, quickly matched by several other airlines, could generate $365 million in pretax savings for the industry next year, according to Brian Harris, an analyst with Salomon Smith Barney.

Northwest has already reduced the number of flight attendants on its Airbus A320s and A319s to the legal minimum of three, down from four. United has quit stocking grapefruit juice and yanked the linen place-mats from domestic first-class cabins. Delta is substituting regional jets for larger jets on its shuttle between Boston and Washington.

Labor costs are headed in the other direction. David Swierenga, chief economist for the Air Transport Association, an industry trade group, estimates that labor costs at U.S. carriers will rise by $6.6 billion, or 15%, to $51.9 billion by 2002 from about $45.3 billion in 2000.

Tough Talks

Both American and Continental Airlines are facing tough contract negotiations with their powerful pilots unions that are expected to result in significantly higher labor costs. "We don't have a choice," says one executive at a "Big Three" airline. "It isn't worth burning the house down trying to save it."

United, which set the pattern for higher labor costs with a rich pilots' contract last year, is expected to post a loss nearing $1 billion for 2001. No. 3 Delta just signed a pilots' contract that will top United's pay rates and boost its costs by $500 million a
year -- more than its entire profit in many past years. No. 1 AMR Corp.'s American is facing even higher pay demands from its own militant pilots, even as it tackles a tough integration of recently acquired TWA.

Mr. Swierenga says elements of the current industry decline -- including a run-up in jet-fuel costs followed by an economic downturn -- are reminiscent of the bleak days of 1990 through 1994. During that period, the industry lost $12.6 billion -- more than it had earned throughout its entire prior history.

Cutting Fares

In light of the soft demand, the airlines have been offering a host of targeted fare sales -- including one launched just Monday by Northwest and matched by other carriers. In some markets, they have relaxed restrictions on leisure fares -- such as advance purchase and Saturday night stays -- mostly to draw back business travelers from low-fare rivals.

Meanwhile, the sophisticated revenue-management systems that help airlines predict demand have begun holding back fewer
seats for the last-minute business traveler in many markets. In other words, the airlines are peddling more cheap seats to match the times.

Says Mr. Bennett, Delta's vice president of revenue management: "Some fare is better than no fare at all."

-- Melanie Trottman contributed to this article.

Write to Martha Brannigan at [email protected], Susan Carey at [email protected] and Scott McCartney at [email protected]

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