Airlines adjust as demand slides

By Jorn Madslien
Business reporter, BBC News

Airlines make less from those who travel behind the curtain

With industry officials and journalists flocking to Paris for this week's biennial airshow, British Airways flight 314 from Heathrow was overbooked.

Some passengers were told there were no seats available, though with compensation on offer, along with seats on later flights, this is a common practice that leaves many travellers happy, according to BA's duty manager.

These days, though, the tactic of turning away customers from flights they have paid for is one the airlines are rarely able to resort to.

Increasingly, as the recession continues to bite, BA and other airlines are flying with ever more empty seats, particularly in business class.

"Business travellers are flying much less," observes Chris Wills, aviation analyst with Ascend Worldwide.

"And when they do travel [they] are downgrading classes and moving towards the back of the aircraft."

This "massive decline in premium traffic" is bad news for airlines, who have long relied on business travellers bolstering their bottom lines and in some cases even subsidising those seated "behind the curtain".

"It has long been the fundamental truism of traditional airline economics that the majority of revenue comes from the front end of the aircraft," says Mr Wills.

Sharp falls

BUSINESS TRAVEL

November: down 11.5%

December: down 13.3%

January: down 16.7%

February: down 21.1%

Source: IATA. All figures year-on-year.

Such cuts in families' and individuals' travel budgets have compounded the problems for the airlines.

"It's a very difficult environment for all airlines," says Willie Walsh, chief executive, British Airways.

Global passenger travel has fallen sharply this year, according to the International Air Transport Association (IATA).

IATA predicts passenger demand will contract by 8% to 2.06 billion travellers this year compared with 2.24 billion in 2008.

"With each day of the recession, the challenges for the air transport industry are mounting," says IATA's director general and chief executive, Giovanni Bisignani.

Less trade

The recession has also resulted in a sharp reduction in cargo demand, down 21.7% in April - a fifth consecutive month at more than 20% below previous year levels, according to IATA figures.

And although "business confidence is improving", air freight volumes are expected to remain low "until inventories adjust to more normal levels", IATA reasons.

Any time you go into a downturn, it's about getting the backlog in place, rather than acquiring new orders

Randy Tinseth, vice president for marketing at Boeing's commercial planes division

"We have not yet seen any signs that recovery is imminent," says Mr Bisignani.

The airlines have responded by grounding planes and closing down routes. IATA predicts capacity will be reduced by 6% this year.

This should enable airlines to improve the match between supply to demand, and thus fly with fewer empty seats. The average passenger load factor stood at 74.4% in April, an improvement over March when it was 72.1%.

Nevertheless, IATA expects passenger yields to fall by 7% this year and cargo yields to decline 11%.

Fewer orders

Airlines are expected to clock up almost $9bn in losses this year, IATA predicts.

This does not bode well for the aircraft makers, most notably Airbus and Boeing. At previous air shows, both these two aerospace giants and other aircraft makers have routinely announced hundreds of fresh orders from airlines.

This year, expectations have been lowered.

Airbus last month said it expects to deliver "up to 300" aircraft in 2009, down from its earlier forecast of 300-400 orders, while last week Boeing - for the first time in more than a decade - lowered its 20-year forecast for the commercial aircraft market.

"Any time you go into a downturn, it's about getting the backlog in place, rather than acquiring new orders," says Randy Tinseth, vice president for marketing at Boeing's commercial planes division.

"This is a tough year for orders," agrees Airbus chief executive John Leahy.

"There will at least be a few announcements, but I can absolutely assure you it will be nothing like the 400 orders we had at last year's air show."