Are airlines about to become victims of their own recent success?
In July, the nation's airplanes were about 80% full, with record load factors seen at both low-cost carriers and their struggling network brethren.
But while packed planes helped some airlines post profits in July, the downside is that customers had to slog through crowded gates and scramble to find a flight that wasn't sold out.
And as the summer travel season wanes, the crowded airports and increased hassle could crimp demand in the fall, a time when airlines are counting on business travel to offset the dip in leisure travel. Business travelers, sick of hassles at the gate, may look for other alternatives, or fly less.
"When load factors are high, it clearly has an impact on demand," said Kevin Mitchell, chairman of the Business Travel Coalition. "We had a lot of leisure sales, as we normally do in summer. Now we're looking to the fall and no one knows. I don't know of an analyst or airline executive that has confidence in looking at September or October and saying there's an uptick in business demand."
Normally, packed planes are a sign of robust demand, but airlines have reduced the number of flights over the summer and cut fares to entice people to fly. The end result is that travelers are getting what they pay for, spending as little as $200 to fly roundtrip cross country, but waiting in lines to do it.
For airlines, the cheap fares are a band-aid on the problem of slumping demand, doing little to increase profitability because fixed costs are so high.
Packed planes, bad weather and cost cuts are already causing flight cancellations. This week, the pilot's union at
said deep cuts to staffing levels have triggered a spate of cancelled flights, with more to come.
"Management's zeal to furlough pilots and improperly staff the airline, without regard to the consequences, has already forced thousands of passengers to change their travel plans," said Bill Pollack, master executive council chairman of the Air Line Pilots Association, in a taped message to members earlier in the week.
On July 31, a Thursday, the ALPA said more than 80 U.S. Air flights were cancelled because of a lack of available staff. Eighty flights are a small percentage of the nearly 1,300 daily flights U.S. Air runs, but union officials -- who are trying to get the airline to rehire pilots furloughed in June -- say the trend will pick up if staffing levels aren't fixed.
U.S. Airways said thunderstorms were the primary driver behind flight cancellations. "We continue to work through staffing changes to improve productivity, which may run counter to ALPA's desire to bring people back from furlough. Other airlines can fly our schedule with fewer pilots and we are seeking a competitive structure," said Amy Kudwa, company spokesperson.
The reality is likely a combination of the two. According to the most recent Department of Transportation statistics, U.S. Airways had the second-worst completion rate during the month of June, which wasn't as affected by weather, with 77.7% of departures arriving on time.
"A load factor like 84% or 85% puts the airline at the stress point," said Tom Parsons, CEO of BestFares.com. "You're talking every single plane is going out almost completely full. It could be weather. It could be mechanical. But when you run at 85%, you are pushing tons of people, with no room for error. That's why we find airlines ending up with oversold seats, putting a delay into the system."
In June, the DOT said the industry's overall on-time performance slipped from May, dropping to 82.4% from 84.9%. Consumers filed 504 service complaints in June, up 3.1% from May, but down year over year. Even more telling, it appears that bumping is making a small comeback, with 1.08 passengers out of 10,000 bumped in June, up from 0.90 in May.
"I was on an American flight to Los Cabos on
last Sunday and it was oversold by nine passengers. They offered me $800 to get off the plane," said Parsons. "I came back Thursday, talked to other passengers, and their planes were oversold, getting offered $300, or $400, or even $500. When you run 90% load factor, a lot of those flights will be oversold."
Videoconferencing: The Other Way to Meet
In the end, business travelers who don't want to deal with hassles at an airport gate can opt to spend four times as much for an unrestricted ticket and get a service level they're more comfortable with.
Or they can meet with clients without flying.
The rise of Web conferencing and videoconferencing is evidence of this trend, according to Mitchell. The Telecommunications Industry Association predicts spending on Web conferencing will jump 44% to $600 million in 2003, with $2 billion spent annually by 2006. Videoconferencing sales are projected to jump 24.5% in 2003 to $2.6 billion, on the road to $4 billion in 2006.
"The traditional business traveler is going to head on the road for three weeks, but the smart one is going to use three weeks leveraging Webcasting and videoconferencing to meet many, many more prospects and understand who is ready to seal the deal," said Mitchell. "And when he goes out one week a month, he's signing deals. I'm seeing more and more of this."
Even if business travel demand doesn't dip, airlines might not benefit. Most experts -- and even airline executives themselves -- say there's been a fundamental shift in the business travel market and that low prices will continue to drive demand.
And because of this trend, it's going to be incredibly hard for airlines to boost yields, which makes it harder to post profits if demand and load factors are to ease from current levels. In the end, this only forces airlines to cut costs to offset discounted ticket prices and rely on packed planes to bring in smaller revenue.
"When you talk about load factors you have to talk about quality of revenue," said Mitchell. "Both are important. And the quality with 85% to 90% load factors is not good."