Skip to main content

May was a good month for airlines, as revenue per available seat mile rose by 12.6%, reflecting strong business travel growth and reduced capacity.

Legacy carriers have been particular beneficiaries, as their pricing has come closer to meeting their low-cost competitors.

"The surging RASM gains are not solely a function of capacity discipline, but underlying demand capacity as well," said JPMorgan analyst Jamie Baker, in a report on the data, which was compiled by the Air Transport Association.

Meanwhile, the number of corporate travelers on all domestic airlines grew 12.5% between February and April 6, while spending on corporate travel jumped 27% during the period, according to a survey of corporate customers compiled by


(AMR) - Get Alpha Metallurgical Resources Inc. Report

unit American Airlines.

The survey of 1,400 top corporate customers shows "the improved business climate," said David Cush, American's senior vice president of general sales. American and other legacy carriers are getting a bigger share of corporate travelers than low-fare competitors, a result of moves early in 2005 to equalize fares between the two segments, he said in an interview.

"People have moved from the low-cost carriers back to the traditional carriers as we reduce the number of fare rules," Cush said. "People like our product, our schedule, our breadth and our frequent flier program. What they didn't like were our prices."

Baker noted that month-over-month mainline system revenue rose 1.1%, the second strongest April-to-May improvement since 2000. Yet domestic yields remain 16% below their peak, "implying still-significant pricing potential" and enabling airlines to "increasingly (wave) off ultra-price sensitive demand."

Scroll to Continue

TheStreet Recommends

Merrill Lynch analyst Mike Linenberg said in a report that he currently predicts a June increase of 10% in mainline passenger revenue per available seat mile, but that "earnings could see further upside" and he may have to revise his estimates upward.

The environment is particularly positive for legacy carriers, said Scott Nason, American's vice president for revenue management. Their move to equalize pricing brought back the flying public and enabled a series of changes in passenger behavior, he said in an interview.

For instance, the long-disdained requirement that passengers stay over Saturday night to get a low fare was eliminated in all but a few markets. Today, the requirement is little more than a symbol of the bad old days in corporate travel.

Additionally, passengers who had flown on one-stop flights to get lower fares can now fly instead nonstop. American cited examples from two markets with heavy business travel. Between Dallas and Newark, the percentage of passengers on nonstop flights increased to 90% from 78% between 2004 and 2006, and between Dallas and Washington's Dulles International, the share increased to 93% from 84% during the same period. In both cases, passengers reduced their reliance on one-stop flights as legacy carriers' fares declined.

As American's fares declined relative to its competitors, passengers increasingly have used major big city airports rather than the outlying facilities often used by low-fare carriers.

Analyst Scott Hamilton said American also must consider that lower-priced competitors like


(JBLU) - Get JetBlue Airways Corporation Report

often offer more amenities. "I think you'd rather fly the legacies if the service were better," he said. "American offers a better frequent flier program, but that's it, and these days I'm not sure that's a big plus because you can't get the seats."

Morningstar analyst Chris Lozier said legacy carriers are benefiting from high demand and reduced capacity, and have done well recently compared with the low-cost carriers.

Over the longer term, he said, increased capacity is likely to reduce pricing power. "In the last year, we have seen capacity discipline and a reluctance to fly unprofitable routes," he said. "But historically, airlines have never been shy about putting more airplanes in the sky."