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 The Brancatelli File

joe IT'S A HARD RAIN
THAT'S GONNA FALL


BY JOE BRANCATELLI

January 23, 1998 -- Fifteen years covering the business of travel and watching the airlines destroy every financial up cycle and exacerbate every down cycle and this is what I have learned:

When the airlines offer vacationers $99 tickets on long-haul, bellwether routes, there is a dangerous imbalance in the amount of airline seats available and the number of travelers interested in parking their butts in those seats.

When the airlines charge frequent flyers abusively high fares, companies realize that business travel is largely discretionary after all and tell employees to sit at their desks until further notice.

When the airlines announce record annual earnings, there are unmistakable signs of the inevitable down cycle buried in the financial reports.

When the airlines do all three of those things at the same time, I go rummaging around my rock 'n roll box, dig out Dylan and start playing A Hard Rain's A-Gonna Fall.

Fire up your CDs and get yourself a big, sturdy umbrella, fellow travelers, 'cause a hard rain is gonna fall. And it's gonna fall soon.

In case you missed the metaphor, what I'm suggesting is that we are at one of those moments when the airline cycle of giddy highs leading to disastrous lows is about to kick in. After a couple of years of rip-roaring, rootin'-tooting profits, the airline industry is about to crash and burn again--and, as always, the carriers are about to take the rest of the travel industry with them.

Look at what's happening right now:

The annual off-season Europe fare sales broke earlier this month and the stunner was the price of a coach ticket to London: $99 one way--or about half the price of last year's off-season fare sale. Tickets to Paris ($119) and Rome ($164) were equally shocking.

Why the historically low fares? There are so many seats in the transatlantic market that the airlines have to post shockingly low fares to get the attention of price-sensitive leisure travelers. Want a three-night vacation in London this winter? British Airways will sell you a package--roundtrip coach airfare, hotels and other perks--for as low as $389, about $150 less than last winter.

Low vacation fares make leisure-versus-business price comparisons a parody. While leisure travelers can book $99 seats to London, business travelers pay $2,630 for a business-class seat. Pull down the calculator on your computer and check my math: $2,640 is almost 27 times more than the lowest coach fare.

But even before that laughably abusive ratio kicked in, there were clear signs that high fares were forcing business travelers to cancel trips. A survey of 400 corporate travel managers reported last month that 50 percent of their companies were sending fewer employees on the road. High fares "just hit you in the face," explains one travel manager, Peter Buchheit of Black & Decker Corp.

As of January 23, five major carriers have announced their 1997 results. They all posted extraordinary revenue and profit figures. Yet the "passenger yield"--which represents what the airlines actually earn on each mile they fly a customer--declined on three of those carriers and was flat on a fourth. In other words, despite the outrageous fares that business travelers now pay, most airlines were able to charge less per mile in 1997 than in 1996.

So here we are with too much capacity, impossibly low fares for leisure travelers, abusively high fares for business flyers and eroding yields on every mile the airlines fly. What's next?

The full effects of the Asian contagion, of course.

As Asian economies collapsed in the second half of 1997, so did airline traffic. As a result, airlines are rushing to drop service. Qantas, for example, has abandoned its Korea routes and reduced flights to Malaysia, Thailand and Indonesia. Continental has pulled five planes from its Micronesia hub in Guam. Northwest is dropping Seoul-Detroit service, Fukuoka-Honolulu flights and is predicting more cuts. United dropped all flights between Tokyo and Manila and Osaka and Guam, then slashed service to Hong Kong from both San Francisco and Chicago.

But the realities of the airline business don't allow you to cancel flights and abandon routes without penalty. While the flights disappear, the equipment remains and those planes have to be flown somewhere. So the airlines put those planes back into service on other routes. That will naturally increase capacity into markets like Europe, where leisure fares have already dipped below three digits and business travelers, feeling abused, are beginning to stay home.

That, of course, is a recipe for disaster, a recipe the airlines last followed in 1990 and 1991. Back then, the catalyst was Iraq invading Kuwait, but everything else was the same: $99 leisure fares on key routes, declining business travel, weakened economies and eroding yields.

I took this scenario to the airlines this week and asked them how they were preparing for the looming down cycle. Not surprisingly, most refused to see the forest or the trees. Others grumbled and admitted, off the record, that they were worried. But one executive had an interesting observation.

"We all know what's coming, but you're not going to get any official of a publicly traded airline to admit to anything for the record now," he said. "We are all going to point to the record earnings, mumble that our immediate bookings look good, then coyly suggest that it's difficult to predict the future. But, yeah, I know Dylan. And I don't argue with lyrics."

Translation: It's a hard rain that's gonna fall.

This column originally appeared at TheTrip.com.

Copyright 1993-2004 by Joe Brancatelli. All rights reserved.