Rebound in Business Travel Lifts Airline Stocks, Weighs on Margins

The good news for airlines and airline stocks is that business travelers are back.  The bad news is business travelers are demanding a better deal. Gone are the nights of wine and roses and limitless expense accounts – in a fragile recovery, frugality rules. And the challenge facing airlines like United Continental (NYSE: UAL), American Airlines (NYSE: AMR) and Delta Airlines (NYSE: DAL) is how to keep business passengers in the seats without eroding margins.

U.S. companies are forecast to spend 5% more on travel in 2011 than they did last year, according to an AP report. That’s double the growth rate from 2010, which followed two years of decline. That’s good news for airlines since business travel, while accounting for only 20% of all passengers, makes up half of airline revenue.

But until businesses feel comfortable that the recovery is deep and real, when it comes to travel expenses they’re more likely to, as NFL great Mike Ditka once said, “Throw nickels around like they were manhole covers.” According to the Global Business Travel Association, corporate travel managers are asking employees to travel on the cheap: spend fewer nights on the road, stay at less expensive hotels, rent smaller cars and, in some cases, book cheaper flights that aren’t nonstop. As a result, the average cost per trip in the first quarter of 2011 is forecast to be $538, 6% below the same period in 2008.

But if companies are looking for real bargains, they may well have to opt for non-business class, connecting flights. Last week, United and Continental airlines parend United Continental Holdings (NYSE: UAL) raised fares on business class, first class and instant-upgrade coach tickets. American Airlines (NYSE: AMR) and Delta Airlines (NYSE: DAL) agreed to match the fare increases since business passengers are less likely to cancel or delay travel because of heftier ticket prices.

If airlines begin to face price resistance from companies on premium business-class fares, they will need to respond with new tactics that offer discounts while keeping profits high. One answer is providing a class of service between business and economy — United Airlines and Delta have begun instituting new Economy Plus programs.

United has had success with its Economy Plus section, which for a fee offers extra legroom and is one of its most popular options. Delta’s Economy Comfort, which is set to begin on the long-haul flights this summer, will charge a fee for early boarding, larger seats and free alcoholic beverages.

Airlines also are moving towards an “a la carte” pricing system in which the fare price just buys the passenger a seat on the plane.  Passengers then are charged fees for extra amenities such as baggage, snacks, premium food, premium coffee, premium beverages, alcoholic beverages, in-flight wi-fi, comfort seats, advanced seat assignment, or priority boarding. Southwest Airlines (NYSE: LUV) is the only airline still moving away from this model with its no-fee, no-frills service.

But if airlines really want to attract business travelers at business class prices they may want to look into offering more elite services to these customers. One unexplored niche is child-free flights. In a survey carried out by the Business Travel & Meetings Show, which was held in London last week, 1000 UK business travelers were asked what annoys them most about first class travel. A full 74% said the presence of children on flights.

While there may be howls of protest from companies over the high cost of business travel, this survey implies that they might be willing to pony up a little more cash for a flight where their employees’ work and productivity isn’t interrupted by screaming children.

As of this writing, Susan J. Aluise did not own a position in any of the stocks named here.

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