The airline industry finds itself navigating through one of its most challenging summers to date, and the impending fall and winter seasons could bring even more adversity—unless there’s a significant resurgence in air travel.
While the industry has been grappling for over a year with reduced spending from leisure travelers, the situation worsened following the near-collapse of the financial system in September of the previous year. Business and international travel, once a relative bright spot, experienced a sharp decline. Managing fuel costs became increasingly difficult, with carriers initially struggling to pay record-high prices last summer and now contending with extraordinarily volatile prices. Additionally, the credit markets, traditionally a source of relief for airlines in tough times, are now particularly reluctant to lend, forcing some carriers to accept high-interest rates.
Analysts emphasize that the airlines, through strategic measures such as cutting routes and employees, grounding planes, and imposing fees, can navigate through the current downturn. However, the severity of the situation is evident as the latest round of capacity cuts, effective in September, will reduce domestic flight seats to 66.5 million, the lowest September figure since 1984.
However, if conditions continue to deteriorate, industry experts warn that some airlines may face an uncertain future.
Hunter Keay, an airline analyst at Stifel Nicolaus in Baltimore, describes the crisis as unprecedented, stating, “There are too many airlines and too much capacity and really no pricing power.”
Giovanni Bisignani, Chief Executive of the International Air Transport Association, echoed similar sentiments in June, calling the current situation “unprecedented” and “the most difficult ever.”
For travelers, this means that airlines will continue to adjust their operations in the fall, not by eliminating service outright, but by reducing frequency and utilizing smaller planes on certain routes. Passengers may also experience the introduction of new fees.
Despite these challenges, there’s a bit of good news for travelers. Airlines, concerned about retaining existing passengers, are still offering low fares, often further discounted. Southwest Airlines recently ran a 48-hour sale slashing one-way fares below $100 on many shorter routes for fall travel, prompting other carriers to quickly match the cuts.
However, the positive impact of fare sales is not sufficient to counter the overarching trend of passenger demand falling faster than the airlines can cut capacity.
The industry has also been compelled to cut jobs, with the total number of employees at American carriers dropping to 583,030 in April, more than 24 percent below the peak in May 2001. Globally, airline employment is down significantly, from 1.71 million in 2000 to 1.48 million in 2008.
Major airline executives, including Willie Walsh of British Airways, have highlighted the industry’s struggle for survival. British Airways recently requested staff members to consider working up to 30 days without pay, while Air France is contemplating temporary layoffs later this year, in addition to the 3,000 job cuts announced in May.
John Heimlich, Chief Economist of the Air Transport Association, stresses that the struggle extends over the decade, stating, “One year’s profit or loss is not adequate to determine a company’s financial health. It’s the cumulative deficit and consecutive years of weakness that have mattered.”
The decline in demand for premium seats on international flights has had a significant impact, with passengers traveling on business and first-class tickets between North America and Europe down 18.4 percent in April compared to the same month last year.
Peter Morris, Chief Economist at Ascend, emphasizes the economic challenges, stating, “With the front end of the plane emptying out, you really can’t afford to keep filling up the back of the bus with ever-cheaper fares.”
Competition on trans-Atlantic routes is intense, with around 50 airlines offering connections between major European and United States cities. The liberalization of air travel through the 2007 “open skies” agreement has kept steady downward pressure on fares on the most heavily traveled routes.
For inter-European travel, the shift by many business and first-class travelers to economy seats has impacted mainline carriers like Lufthansa and Air France-KLM. However, low-cost carriers such as Easyjet, Ryanair, and Air Berlin may benefit from passengers willing to accept lower frequency and fewer amenities.
While all American carriers are facing challenges, analysts are closely monitoring the financial condition of United Airlines and US Airways. United’s reliance on corporate and trans-Pacific fliers, coupled with a lowered credit rating and high-interest debt, raises concerns. US Airways, struggling since a 2005 merger, faces cash constraints with limited borrowing options.
Analysts estimate that fees now constitute nearly 5 percent of revenue at some large airlines. Still, the fees alone cannot offset falling income.
The industry’s best outlook is if passenger demand picks up soon, allowing airlines to bolster airfares, a crucial step toward a turnaround. “If there’s going to be a recovery, it will most likely take the form of fewer discounts,” says Gary Chase, an airline analyst at Barclays Capital in New York.
Passengers are already feeling the impact of capacity cuts, with crowded flights becoming the norm. Michelle Zeccola, a frequent flier from Columbia, S.C., recalls a time when planes were less crowded, stating, “I could literally sit across three seats by myself if I wanted. Now it’s totally booked.”
As the industry grapples with ongoing challenges, its future hinges on adapting to changing circumstances and the potential revival of passenger demand.
