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In the domestic airline business, less bad news is good news these days.
So some industry people are congratulating each other over new estimates that airlines in North America will collectively lose only about $5.4 billion this year, compared with $10.8 billion in 2005.
That projection, by the International Air Transport Association, is based on an assumption that oil prices will average $57 a barrel this year. Incidentally, oil prices rose to $64.16 a barrel yesterday. Still, Giovanni Bisignani, the director general of the International Air Transport Association, was a font of cautious optimism last week in a speech and a subsequent interview in New York.
For world airlines in general, "cost-cutting and the economic recovery have been so strong that we cut our 2006 loss projections in half, to $2.2 billion," he said. Actually, carriers in Europe, the Asia-Pacific and other world markets are projected to post profits totaling about $3.2 billion this year, but those gains will be offset by the $5.4 billion in projected losses in North America.
But even in North America, Mr. Bisignani said, higher fares, reductions in domestic capacity and continued cost-cutting are leading to "higher yields" and improved financial conditions.
Higher yields, by the way, is another way of saying higher fares.
On domestic airlines, yields were up 10.1 percent in the first two months of this year compared with the same period last year, according to the Air Transport Association. At the same time, the number of passenger miles flown rose 1 percent, while the number of available seats fell 4.6 percent.
Here's what I think that all portends.
One, domestic fares will rise more than some industry analysts have been predicting. Given high oil prices, airlines still cannot make money at current fare levels.
Two, projections for steadily growing demand for domestic air travel may be overly optimistic. That is because a certain percentage of demand, mostly leisure travel, has been driven in recent years by rock-bottom fares. That bottom-rung leisure niche — its size is unknown because so many business travelers jump into it when it is convenient — is extremely price-sensitive. If air fares increase significantly, and they have been edging up week by week, leisure demand may start eroding.
Three, if and when that happens, major airlines are going to be looking for more support from their most loyal and lucrative customers, frequent business fliers, who have to continue flying. But, as noted here last week, airlines have lost the loyalty of a good number of those customers, especially the ones who maintain elite status levels.
That is because elite status benefits like upgrades and first chance at choice coach cabin assignments like exit rows and aisle seats have been sharply reduced. Last year, airlines cut first-class fares to the point where flying in first class now often costs little more than flying full-fare coach — meaning fewer first-class seats were available as free upgrades. And airplanes are now flying full, and choice seats are booked well in advance on many flights, without regard to status.
There was a lot of reaction to last week's column about what many business travelers, myself included, see as the deterioration of elite status programs. A good number of readers said that they, like me, were so unhappy with the decline in benefits for maintaining loyalty that they had simply given up on working to hit the annual mileage mark for elite status.
A small number of mileage geeks, devout believers in the sanctity of frequent-flier programs, were hostile toward my suggestion that the elite status game was not worth the effort.
But a significant number of other readers also pointed out something that anyone who understands simple industry economics readily concedes. "You have been flying on unbelievably cheap fares long enough," one fellow wrote. "The airlines and their employees have subsidized you and all travelers. It is time for you to start paying a fair price for your safe air travel and stop the whining."
I believe he is correct about fares. But elite status members who feel alienated despite their loyalty certainly are not whining when they say they are now looking at air travel as a commodity. They are simply making rational buying decisions without regard to brand loyalty anymore.
Mr. Bisignani acknowledged that the days of fares sold below costs were waning. Fares "have been quite low for some time," he said, adding, "They will increase."
