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Coach Fliers Starting to Balk at Higher Airfares

Business travel is alive and well


Air travel continued its modest post-recession rise in February, albeit at a slightly slower rate compared with the month before, the International Air Transport Association announced in its monthly report on Tuesday.

The good news for the airline industry: business and first-class passengers are continuing to take to the air.  The bad news: economy passengers are starting to push back against higher fares and fees. 

The year-over-year volume growth of premium passengers was 7.7% in February, down slightly from January’s 8.1% growth rate, but an increase nonetheless. Because the premium travel market is less sensitive to price, the gradually strengthening economy still was pushing volumes upward.

By comparison, the growth rate for price-sensitive economy-class travelers slipped from 4.9% in January to 3.3% in February.

Airlines are never happy to lose customers.  But if they had to choose, higher-paying, premium passengers (a segment largely comprised of business travelers) are more valuable. That’s not because airlines view economy passengers as the modern-day equivalent of Leonardo DiCaprio exiled to steerage on the Titanic.

It’s because those business travelers account for half of all airline revenue — even though they make up only 20% of all passengers.   

Even more good news for airlines: a report released by the Global Business Travel Association last week says 2011 travel spending is now expected to be even stronger than estimated  — growing by 6.9% for the year, up from the 5% growth the group forecast earlier.

But the airline industry still faces headwinds from rising fuel prices, the March dip in business confidence and lost revenue from profitable Asia routes in the wake of the Japan disaster.  Airlines are coping with these challenges in two ways: capacity cuts and premium perks.

Delta Air Lines (NYSE:DAL) and US Airways (NYSE:LLC) are cutting capacity by 2%; United Continental (NYSE:UAL) is trimming its year-over-year capacity by 1% for its summer flights and as much as 4% this fall.  AMR Corp.’s (NYSE:AMR) American Airlines is cutting capacity by about 1%.  The airlines could further reduce the number of seats if there is no relief from fuel prices.  It is nearly certain that the cheapest seats will be the first to hit the cutting room floor.

Premium perks are another way to boost revenue.  For its international routes, Delta is investing in a fourth class between economy and business class – “economy comfort.” US Air is adding a First Class section to its small commuter jets.  The airline also is upgrading food and beverage selections for all premium class passengers – and even adding filet mignon to the menu for business-class travelers on routes to Europe, the Middle East and South America.  United Continental already has retrofitted first and some business-class sections of 116 aircraft with flatbed seats.

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

Article printed from InvestorPlace Media,

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