david grossman june 17, 2009 business travel outlook for 2009: uncertain, tumultuous times copyright...

David Grossman

June 17, 2009

Business Travel Outlook for 2009:Uncertain, Tumultuous Times

Copyright 2009 by David Grossman

June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 2

Business Travel in Tumultuous Times

2009

Economic Crisis2008

Oil Crisis

What does it mean for business travelers?


The Recession of 2009Declining Travel Demand

Airline Passenger Traffic Falls

March 2009 vs. March 2008• -10% U.S. • -11.1% International

April 2009 vs. April 2008• -3.1% International

Source: Air Transport Association (ATA)

International Air Transport Association (IATA)

From the Airline Perspective:

“This is the most difficult situation

the industry has faced. After

September 11th, revenues fell by

7%. It took three years to recover.

This time we face a 15% drop.”

--Giovanni Bisignani, Director General,

International Air Transport Association

June 8, 2009


From the Airline Perspective:

“Things have certainly not

improved. It would be foolish to

think that things are going to get

better anytime soon.”

--Gary Kelly, CEO, Southwest Airlines,

speaking at AAAE Meeting June 15, 2009



The Recession of 2009International Business Travel Decline

• Premium (first and business class) passengers declined by approximately 18%

• Economy class passengers down by 8.3%

Source: IATA Premium Traffic Monitor Feb 2009

(Feb 2009 vs. Feb 2008)


The Recession of 2009Business Travel Decline

• Passenger traffic across the Pacific to Asia declined by 27.3%

• Passenger traffic across the North Atlantic fell by 22.5%

Source: IATA Premium Traffic Monitor Feb 2009

(Feb 2009 vs. Feb 2008)


Most corporate buyers have cut spending 20% to 30% since the beginning of the recession

-- David Meyer, Editor in Chief, Business Travel News


The Recession of 2009Corporate Travel Departments React

• Meetings, particularly internal, take hit• Increased demand management• Travel policy changes• Some corporations downgrading

– Business/first class to coach– Lower hotel class

• Increased use of virtual meetings


Many business travelers are chained to their desks


Road warriors become conference call warriors


The “AIG” Effect:“fun” destinations take biggest hit

Some meetings move to urban business centers


The Recession of 2009Travel Suppliers React to Shrinking Demand

• Airlines cut capacity/ground planes• Airlines and hoteliers slash prices• Some hoteliers reduce amenities• Some hoteliers charge for amenities or

services formerly included in room price• All suppliers pursue business travelers


Source : Air Transport Association


Capacity Cuts vs. Slumping Demand(Change year/year Jan-May 09/08)

Fewer Seats for Even Fewer Passengers

Avail Seat Miles

Rev Psgr Miles

Load

Factor

Psgrs Flown

AA -7.8% -10.5% -2.4% -10.6%

CO -7.5% -8.7% -1.1% -11.5%

DL/NW -6.9% -9.2% -2.1% -8.9%

UA -11.9% -14.4% -2.3% -16.2%

US -3.4% -5.2% +0.5% -7.8%

WN -3.5% -2.2% +0.9% -6.8%


Some New Capacity Cuts

Announced Last Week

• AA domestic from 6.5% to 7.5%

• AA international from 5.5% to 15% over past two years

• DL domestic from 6%-8% to 10%

• DL international from 10% to 15%

• FL will cut 7%-8% in 2Q09


Local Impact of Capacity Cuts (July 09/July 08)

• -6.9% Pennsylvania – State (26th highest)• -6.9% National Avg. (@ 300 airports)• -5.1% PHL• -1.1% ABE• -.6% MDT• +1.6% AVP

Source: USA Today/Official Airline Guide


PHL Enplaned Passengers

Source: DOT Statistics

x 1,000


Capacity Cuts: Who Loses?

• Smaller communities

• High frequency routes

• Smaller, redundant hubs

• Leisure/vacation destinations

• Secondary airports in large cities

• Competitive routes with multiple carriers

• Communities served by smaller regional jets


Capacity Cuts Impact Secondary

Airports in Multiple Airport Cities

Source: USA Today/Official Airline Guide – July 09 vs. July 08

OAK -19%

SJC -16%

SFO -3%

BOS -3%

MHT -15%

PVD -9%

FLL -11%

MIA -2%

PBI -11%

BUR -14% ONT -18%

LAX -7% SNA +1%

LGB -8%


Smaller Hubs in Top 15 Capacity Cuts

• 24.3% Cincinnati (DL)

• 18.1% Cleveland (CO)

• 15.2% Pittsburgh (US)

• 12.3% St. Louis (AA)

Source: USA Today/Official Airline Guide

6.9% nat’l avg. July 2009/July 2008


Impact of Capacity Cuts

• Fewer options for business travelers

• Increased travel times

• Longer waits

• Canceled flights

• Longer drives to smaller

communities

• 87 smaller U.S. airports lost all

commercial service in 2008(Source: Air Transport Association)


Additional Impact of Capacity Cuts

• New aircraft orders deferred

• Squeezing into smaller aircraft– A319 Transcons

– RJs on BOS/NY/DC

shuttles

– Narrow body 757s on

transoceanic flights


The Bright Side of Capacity Cuts

• Fewer flight delays

• Fewer cancellations

• Fewer lost bags

• Older aircraft retired


The International Party is Over

Capacity cuts are not limited to domestic flights

In last few years U.S. airlines moved 10% to 15%of capacity to international markets to avoid LCCs and capitalize on global economic boom

Now airlines are shrinking internationalcapacity in global economic crisis and deferring start of new hard-fought routes


International Capacity CutsAirline Year/Year

AA (-5.9%)

CO (-0.5%)

DL (-6.9%)

NW (-15.4%)

UA (-8.2%)

US +14.8%

AF (-4.1%)

BA (-0.6%)

LH (-3.8%)

Seats from U.S.to foreigndestinationsMar 09/Mar 08

Source: USA Todayand Official Airline Guide

The international

party is over


Will Capacity Cuts Last?

• Low Cost Carriers (LCCs) traditionally move to fill the capacity void

• In 2008 $150/barrel forced LCCs to abandon growth and enter survival mode

• When oil prices dropped to $50-$60/barrel LCCs resumed expansion

• In recession price matters to the customer – travelers purchase the cheapest ticket

• Continued LCC growth depends on oil prices


Does slumping travel demand

translate to lower airfares?

The Recession of 2009


Air Fare Ups and Downs

Plummeting travel demand has reversed

the two year cycle of fare increases

• 2007: 17 successful fare increases

• 2008: 15 fare hikes through July

• 2009: more than 25 fare sales(Source: FareCompare.com)


Air Fares Decline

(June 2009 vs. June 2008)

U.S. national average ticket

• $275 is 19% lower than $339

Average ticket price for PHL

• $270 down 14% from $314

Source: Farecast.com


Philadelphia Air Fare Trends in 2009

• Highest average air fare was $272 as of

June 14th

• Lowest average air fare was $216 in

early January

• Average fare rose 19% from $226 on

January 1st to $270 on June 15th



Philadelphia Air Fare Trends(June 2009 vs. June 2008)

Top Losers

• PHL-CLT down 50%

• PHL-CLE down 34%

• PHL-SAN down 31%

Top Gainers

• PHL-JAX up 22%

• PHL-TPA up 11%

• PHL-CMH up 11%



International Premium Seat Glut

Premium ticket prices declined by 6% in 2008(Source: IATA)

The international business class seat glut

caused by:

• Recession

• Stronger U.S. dollar

• Business travelers downgrading to coach


International Premium Seat Glut

Business Class Bargains Abound

• NYC-LON $1,829

• IAD-MOW $2,519

• LAX-SEL $2,602

• LAX-SYD $4,089

Source: Orbitz.com


Capacity Demand

It all depends on capacity vs. demand

Will Air Fares Remain Low?


Air Fares Will Stay Low or Decline if:

• Oil prices remain low

• Travel demand continues to soften

• Capacity cuts can’t keep pace with

slumping demand

• LCCs continue expansion


Will airlines reverse their move to a la carte (unbundled) pricing?

•Checked bags

•Seat selection

•Food/Drink

•Headsets/Entertainment

•Pillows

•In-Flight Wifi…and more


Airline addiction to surcharges and ancillary fees

• JP Morgan Chase says new fees will generate $3 billion annually

• UA projects $1.2 billion from fees in 2009• Continental is the lone airline still serving free meals in coach• Only Southwest has refrained from adding most fees…so far• Fuel surcharges are the most likely fee to go …until fuel prices

rise again


2008: Red Ink Returns

Airline Net Loss x $1m Cash x $1b Debt x $1b

WN $178 $2.0 $3.7

B6 ($76) $.8 $3.2

FL ($274) $.3 $.9

CO ($585) $2.6 $5.8

AA ($2,071) $3.6 $15.1

US ($2,210) $3.0 $4.0

UA ($5,438) $2.3 $6.8

DL/NW ($8,922) $6.1 $16.6

Totals ($19,398) $20.4 $55.2


1Q 2009: Red Ink Continues for Network Airlines

Airline Net Loss x $1m Cash x $1b Cost/Seat Mile (cents)

US ($103) $2.1 11.1

CO ($136) $2.7 10.6

AA ($375) $3.6 11.8

UA ($579) $2.5 11.1

DL/NW ($794) $5.0 11.7

Totals ($1,987)


2009 Airline Industry Loss Projections

Region x $1b

North America $1.0

Latin America $.9

Europe $1.8

Middle East $1.5

Asia-Pacific $3.3

Africa $.5

Totals $9.0

IATA doubled

projected loss

last week

U.S. airlines already lost $2b in 1Q09

How long can they last?

June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 50Source: Airline Weekly


1Q 2009: Red Ink Around the World

Airline Net Loss x $1m

AF/KL ($656)

BA ($525)

LH ($332)

easyJet ($130)

Ryanair ($190)

Airline Net Loss x $1m

ANA ($137)

JAL ($616)

KE ($413)

MH ($199)

SQ $43

Source: Airline Weekly


1Q 2009: LCCs Recover with Lower Fuel Prices

Airline Net Loss x $1m Cash x $1m Cost/Seat Mile (cents)

WN ($91) $2,100 10.0

B6 $12 $634 9.1

FL $29 $315 9.2

F9 ($161) $70 8.5

VG ($40) $38 9.5

If oil prices continue to rise LCCs will be forced to scrap expansion plans and raise fares to survive


Low Cost Carriers Are Growing Again

• AirTran: Allentown, Asheville (NC), Atlantic City, Branson (MO), Charleston (WV), Harrisburg, Knoxville, Portland (ME), building hubs in MCO and MKE

• jetBlue: Barbados, Columbia, Costa Rica, Jamaica, LAX, Saint Lucia, SFO

• Southwest: BOS, LGA, MKE, MSP, code share to Canada and Mexico

• Virgin America: BOS, LAS, SNA – nine destinations in first two years of operation


Southwest’s Oil Hedge Problem

69 consecutive profitable quarters, now 3 losses

4Q08 would have been +$61m without hedges

Southwest is dumping fuel hedges, but still has

nearly $1b in liability.

2006 2007 1Q08 2Q08 3Q08 4Q08 1Q09

$499 $645 $37 $529 ($205) ($83) ($91)

Profit / (Loss) (x $1 million)



When oil prices were high

Southwest made money

because they were still

purchasing fuel at 33%

of the market price

…an ingenious strategy…



Year Hedged Hedge Price2005 85% $26

2006 73% $36

2007 95% $50

2008 70% $51

2009 75% $73

2010 50% $90

2011 40% $93

2012 35% $90

Southwest kept

other airlines

prices in check

…that allowed Southwest to make money

while others couldn’t.


WN Pursues Business Travelers

• Priority boarding for full fare customers• Families board later• Drink coupons for full fare customers• Power/USB hookups in gate areas• No change fees or other fees• Pursuing business destinations• Using major airports• Galileo distribution arrangement• WestJet and Volaris alliances


Southwest Airlines Continues to Grow Mkt Entry

DateMkt Share 12/06

Mkt Share 3/09

Current Rank

PHL 2004 12.1% 14.8% 2nd

PIT 2005 11.6% 17.4% 2nd

DEN 2006 3.5% 11.7% 3rd

IAD 2006 -- 4.5% 5th

SFO 2007 -- 7.8% 3rd

BOS 2009 -- ??? ???

LGA 2009 -- ??? ???

MKE 2009 -- ??? ???

MSP 2009 -- ??? ???


Next for Southwest?

• Rapid expansion at BOS, DEN, LGA, MKE, MSP, SFO

• Entry into Northeast shuttle market

• Entry into CVG and MEM as Delta refocuses after NW absorption

• ATL and CLT – it’s only a matter of time

Oil Prices on the Rise Again



Network/Legacy Airlines Still Disadvantaged

• Even with capacity cuts, ancillary fees, and fare hikes of the last two years network/legacy airlines are still losing money in the global recession

• Even after bankruptcies and restructuring network/legacy airlines still have higher cost structures than LCCs

• LCCs are driving prices down again


Airline Fleet Types

WN 1

FL 2

B6 2

CO 4

AA 6

UA 6

US 6

DL + NW 9 or 10

Even after bankruptciesand years of cost cutting,LCCs still have cost advantage over legacy airlines with multiple aircraft types

Excludes commuter affiliates and regional jets with <90 seats


The Aging U.S. FleetAirline Years

jetBlue 3

AirTran 4

Southwest 10

Continental 10

US Airways 12

United 13

Delta 14

American 15

Northwest 18

A problem that

will outlast

the recession


Likely Candidates for Retirement

Airline Aircraft Type # in Fleet

Avg Age

(Years)

DL/US 757-200 163 16-18

AA/DL MD80 417 18

CO/UA/US 737-(200-500) 248 16-20

AA 767-200 15 21

NW DC9 94 36


Other Aviation Trends

• Consolidation (particularly in Europe, LCCs)• DL/NW “realignment” (downsizing)

• Open skies

• Alliance switching

• Long range aircraft over-flying traditional hubs

• Center of commerce shifts east


Over-flying Traditional Hubs

• New aircraft allow super long flights• New non-stop routes:

– JFK, IAH, SFO, LAX to Dubai– JFK to Abu Dhabi– IAD to Doha– ORD to Delhi– JFK to Mumbai– SFO to Bangalore

• The losers will be AMS, CDG, FRA, and LHR


U.S. Hotel Industry Metrics

April 2009 Change

Avg Rate/Day $98.37 (-9.4%)

Occupancy 56.4% (-11.1%)

May 2009 Change

Existing Rooms 4,744,971 +3.1%

In “Pipeline” 522,778 (-22.2%)

Source: Smith Travel Research (year over year))


Hotel Industry Metrics

• Bookings down 3% in 4th quarter 2008*

• NYC hotels selling for <$125/night*

• Rising hotel participation in Priceline distressed

inventory booking product

• Global hotel prices dropped by 12% last year**

Sources: Carlson Wagonlit Travel*, Priceline and Hotels.com**


U.S. Hotel Projections

2009 2010

Avg Daily Rate (ADR) $102.89 $104.41

ADR change Y/Y -3.6% +1.5

Occupancy Rate 56.5% 56.5%

Source: Smith Travel Research (STR) (April 2009)


Hotel Trends

• 1 less air booking = .4 fewer hotel stays*

• Luxury brands hurting as

more travelers downgrade

• Some hotels are removing amenities from

rooms, coffee, snacks from lobby, etc., and

charging for Internet access*Carlson Wagonlit Travel and Pegasus


The Problem With Car Rental Rates

Rental cars should lose

customers proportionately

to air and hotel, but any

savings may be buried

in taxes and fees assessed

in many cities


Travel Industry in Recession:Open Questions

• Are business trips postponed or lost?• Are increased webinar, video, conferencing

permanent changes?• Is downgrading policy permanent?• Will capacity keep pace with demand?• Will prices stay low or decline more?• Will business travel recover before the

recession is over?


Recommendations in a Recession

1. A good time to travel if you have funds

2. Renegotiate corporate contracts

3. Consolidate meetings spend in travel dept.

4. Practice demand management

5. Reduce travel for internal meetings

6. Use more computer/teleconferencing

7. Watch for last minute specials and price reductions and seek credits and refunds


Recommendations in a Recession

7. Leverage preferred relationships

8. Avoid ancillary fees with WN, elite status, packing light

9. Stay at hotels with free breakfast, Internet access, business center, parking

10. Consolidate multiple stops on one trip

11. Encourage more day trips

12. Strong $ dollar = bargains abroad

David Grossman

June 17, 2009

Business Travel Outlook for 2009:Uncertain, Tumultuous Times

Copyright 2009 by David Grossman

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