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Tuesday, November 04, 2008

Is the reported "airline recovery" just the upside of the jetfuel roller coaster?

In an article in the Financial Times yesterday, Justin Baer reports that the "US Airlines pull out of a tailspin".

Airlines are indeed enjoying much lower fuel costs than they did in the summer of 2008.

Perhaps the use of the word "enjoy" and the notion that recovery is around the corner is a bit like a weatherman in the middle of a hurricane talking about tomorrow's sunshine. At least that was the observation of a writer in Airline Weekly this week.

When the prices were high, the airlines kicked into high gear, cutting costs, trimming schedules, parking aircraft in the desert and finding ways to charge passengers for various services, previously offered gratis.

Now that the prices are low (remembering that everything is relative), will they hand off a slice of those profits to consumer? Not likely! And what will be the impact on the other sectors of the industry?

The GDS companies depend on airline ticket sales for 90% of their revenues. And the hospitality industry also caters to the air traveler as their primary market. What will become of them?

It is an interesting conundrum that must face airline executives at this juncture. The dire situation that they found themselves in this summer has subsided. They reacted, adjusted and are now even predicting profits in early 2009. So what do they do now? How will they be seen by their peers and by the press and by their customers?

To Wall Street and their Board, they no doubt will be heroes. Perhaps the chief executives will even be dubbed "turn around artists" and awarded bonuses, much to the chagrin of furloughed employees.

They will take a significant amount of criticism from the press and perhaps even be accused of greed as they pocket the difference in the fuel prices of the summer and now, versus handing it to the consumers as has happened at the pump.

To the consumers, well, it is a mixed bag of reactions. For the business traveler, it is nice to have empty center seats on their frequent trips. Frequent travelers have adjusted their packing habits to reduce the need for checking extra bags for a fee, they have figured out that they can buy a bottle of water in the airport versus paying $5 on board for the precious H20 and most of them have received a pair or two of high quality noise-canceling headphones on a birthday or on Christmas, so they aren't having to pay to listen to the audio or a movie. For the leisure travelers, perhaps they aren't flying as much due to the high fares and enjoying family time in the car instead.

I loved the quote from
Michael E Levine, a former airlines executive who teaches at New York University's School of Law, in the Financial Times article that cautioned that carriers need to tread carefully even as they benefit from the rapid descent in fuel costs. Mr Levine points out that it is paying passengers, and not cheap fuel or brand-new efficient aircraft, that shape an airline's fate. Can you say amen to that?

At the end of the day, if the airlines remain with the status quo, we will have fewer flights, translating into fewer seats for sale, online and offline.

The GDSs will suffer a decline in bookings, travel agencies will see (and in fact have already seen) a decline in tickets issued and hotels and restaurants will have fewer guests.
As I mentioned a few days ago, ARC is already reporting double digit declines in agency ticketing in October.

And of course as we wait for consumer confidence to be restored, we keep one eye on the price of a barrel of oil, as who is to say what will happen to it moving forward?

In the meantime, is the onus is on the airlines to play their proper role in stimulating the economy by lowering prices? Would you if you were in their shoes?

If we are in fact just on the upside of the jet fuel roller coaster ride and another downturn (in the form of higher oil prices) is around the bend, then perhaps they are wise about banking the profits and storing up for a rainy day.

Chicke Fitzgerald
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