Uh Oh: Airlines' Premium Traffic Falls

As if oil just a whisper under $130 isn’t enough to make an airline executive cry, another stroke of bad news emerged that is potentially even more worrisome. Premium traffic, the folks who populate business and first class, dropped 3.9% in March – the biggest amount in five years, according to data released May 20 by the International Air Transport Association.
In fact, if corporations and the well-heeled decide to spend less on flying, for whatever reason, this rapidly becomes the worst-case scenario for major international network carriers. Airlines the world over, and nowhere more than in the U.S., have been staking their path to sustainable income on the high-end segment. The decline follows a 5.1% gain in February, which was distorted by an extra Friday because of leap year. But even on an adjusted basis, the decline was 1-2% in March. “The airlines obviously make a lot of their money from the front of the cabin, so that’s a key part of many airlines’ business models, especially internationally,” IATA spokesman Steve Lott says.
Internationally, the fares are far more robust, the margins far cushier. For example, on May 19 Delta announced new service this fall from Atlanta to Kuwait – a route clearly geared toward business. It’s a continuation of a long trend by airlines toward high-growth business areas such as India, Russia, China, Dubai, Brazil, and Israel. The new city pairs the airlines are planning to fly literally follow the money: Houston to Dubai, via Moscow; Washington D.C. to Moscow; D.C. to Kuwait; New York to Amman; Seattle to Beijing.
“Given the importance of premium passengers for airline profitability the absolute decline in numbers is bad news, particularly since the price of jet fuel rose 170% over the year to March reaching $130 per barrel,” the group said. (That may qualify for an understatement of the year award.) Oil futures hit a new record high of $129.60 Tuesday on the New York Merc.
But, one may quickly interject, what about the credit crunch, the turmoil for the big banks, the threat of recession, an overall weak economic state for North America and Europe? That unease has certainly diminished the amount of corporate business-class flying between the continents, right? Not quite. “The pattern of passenger growth across the regions does not, at first sight, appear to support the idea that the U.S. economic downturn is the principle driver behind the sharp slowdown in the growth of passenger numbers,” the association said. North Atlantic travel remained strong: premium traffic in that region is up 4.6% year-to-date over 2007 and rose 0.7% in March compared to the same period last year. The region also still accounts for the lion’s share of total premium revenues, at 26.5%. Europe to the Far East is next, at 15.7%.
IATA notes a diverging tale on traffic flows. While the weak dollar has helped boost U.S. exports and the flow of business traffic from America abroad, the leisure market has seen the opposite trend. Tourists from Europe flock to the U.S. for bargain holidays and shopping, while Americans are likely to stay home because of their reduced purchasing power in the euro zone.
One key thread in the March decline seems to rest largely within Europe, where a slew of budget carriers on short-haul flights stripped off premium traffic. I mean, for a 90-minute flight from Frankfurt to London, how much would you pay for a posh seat, a cocktail and a canapé? The longer-haul is still where the money and people are, and that’s why March premium revenues did not fall as steeply as the traffic, which dropped 17.1% compared to March 2007. Year-to-date, premium traffic within Europe is down nearly 11%, trailing only Europe to the Southwest Pacific in terms of decline.
It will be worth watching the premium data for April, and airlines will look eagerly to a new financial report on the industry that IATA plans to release in early June. Right now, the airlines' wager is that economically expanding regions will continue to fuel premium travel. If that bet turns wrong, no amount of capacity chopping and fare cutting will save the industry from a bleak trip through drastic reorganizations.