After a year of slashing ticket prices to lure in a shrinking pool of travelers, airlines can now look forward to a modest recovery next year as premium-paying business travelers begin returning to the skies.
On Wednesday, American Express Business Travel predicted global-wide international and long-haul business-class airfare will rise 1% to 6% in 2010, on average. Domestic airfare is expected to be flat to up by 5%.
For North America, which accounts for nearly a quarter of all global traffic, domestic business-class airfares are likely to climb 2% to 7% next year, and 1% to 6% or long-haul and international flights, American Express said.
Wall Street analyst reaction was mixed, noting how difficult it is to predict the many variables influencing ticket prices.
“I think it’s optimistic on Amex’s part,” said Forester Research analyst Henry Harteveldt. “Demand for business-class traffic remains soft, and if anything, airlines will be lucky to just maintain their current prices.”
“I hear it from executives all the time: The pressure on pricing is enormous,” he said.
American Express cited potential GDP growth for driving the higher ticket prices, helped by the rollback in airline capacity and pent-up demand among businesses that slashed travel spending this year and put off customer meetings.
“As demand increases [airlines] can then increase capacity gradually to further influence pricing, said Frank Schnur, vice president of the group’s advisory services, during a press conference.
Overall, global-business travel is expected to climb by about 6% next year, following a 7% drop in 2009, the group said.
Investors are ready for some positive news after bidding up the NYSE Arca Index more than 27% since the beginning of the month, betting an economic recovery next year will return the industry to profitability.
Carriers have to adapt to a more savvy business traveler
Airlines have been operating at record load factors despite the global recession and the slide in demand because of seat-capacity cuts. Airfare, however, has plunged because fewer people are traveling overall, but that decrease appears to be decelerating and may reverse in 2010 as the economy recovers, industry experts have said.
But the recovery for airlines won’t be roaring back, Schnur said, because corporations have changed the way they look at travel, cutting back on trips that do not have a strong payback in revenue.
“Companies now look at travel as less of a cost and more as an investment, with the same expectations on its return,” Schnur said. “Travel is not office supplies.”
As a result, corporate travel offices have become more detailed-oriented when its employees set out to meet clients, and are demanding new ways to scientifically track results.
That will likely result in fewer trips and less spending, and it will mean airlines will have to improve their services, both for the customer experience and for tracking business-traveler costs.
“Service excellence is essential to keep the respect of the business traveler,” Schnur said.
At the top of business travelers’ complaints are ancillary revenues, such as fuel surcharges and checked-bag fees, which can typically add 25% more to business airfare once the ticket holder begins traveling, said Christa Manning, a director with American Express Business Travel.
Businesses want predictability, Manning said, and they want a way to calculate the extra costs before their employees even set foot in the airport.
Along that line, businesses are also making a concerted effort to book their flights earlier to avoid hefty last-minute premiums, and are having their employees move to economy class.
American Express figures 64% of all business trips aboard airlines held economy-class tickets this year, compared to about 50% seen in past years.