How fare’s thee?

April 27, 2011

Here’s what we know. Air-passage demand is rising, along with airlines’ costs as $100-a-barrel oil erodes bottom lines (U.S. crude hit $112.05 yesterday). As a result, air fares continue their upward journey. Leisure travel this summer will almost certainly be affected, but at what point, if any, will business voyagers start to baulk at fare increases?

This week and last, U.S. airlines have been releasing their quarterly results. Losses among the larger carriers were substantial, though smaller than expected.

Delta, whose quarterly loss netted at $318 million, is adjusting fares “with a goal of recapturing the full cost of fuel on every flight, every day,” as the company’s CFO told Reuters. On a call to analysts a few days later, Delta Chief Executive Richard Anderson explained that, “Where we cannot get the necessary revenue increases to offset the increased cost of operating the flights, we will remove capacity.”

It was a similar story with American Airlines parent AMR, whose first-quarter net loss narrowed to $436 million from $505 million a year earlier. The corporation said it planned to trim fourth-quarter system capacity by 1 percent.

It is worth noting that air capacity had been unseasonably high. Aviation information service OAG reported recently that global airline capacity this month is at record levels, 5 percent higher than the same month in 2010 (13.9 million more seats) with 3 percent more flights scheduled to operate worldwide than last April. This surplus inventory will now quietly be withdrawn; for business travellers cutbacks could mean less frequency on some routes and the cancellation of flights to less-popular destinations.

On 12 April, the Global Business Travel Association (GBTA), an industry group, released their “Business Travel Index”, a new report that gauges travel spending trends and business travel industry health. They found Q4 2010 was surprisingly strong, which led them to revise their overall forecast upward for 2011.

Total U.S. spending on business travel grew by 3.2 percent in 2010 – up from 2.3 percent for the year as forecast previously. Extrapolating from these figures, the group expects spending in 2011 will be even stronger than previously estimated, advancing by 6.9 percent for the year. This revision is equal to $1.9 billion more business travel spending than previously forecast.

I asked GBTA’s Executive Director and COO, Michael W. McCormick whether he thinks fare rises will stymie this trend. Short answer: no. He explained that increases in travel prices have been on the radar for quite some time, and argued that “while rates are rising, we’re also seeing continued growth and investment in business travel. That’s because road warriors are on the road for a purpose – to do business – and so far, higher prices are not deterring companies from this investment in future growth.”

GBTA’s final numbers for 2010 show growth of 17.3 percent in international travel spend for the year; international outbound travel is expected to continue to grow by 7.9 percent in 2011. McCormick says this shows that executives are increasingly looking to enhance and forge new global business relationships. “When companies are investing in business travel they are looking to grow”.

Spiralling airfares could have wider ranging effects than just irritating air passengers. If it wasn’t for the fact that demand for business travel is relatively inelastic, global economic health itself might be threatened.

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