Air Travel Gets a New Model

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Passengers wait to check in at the US Airways counter in Miami

You might think, after seeing the bar-rage of bad news about the major airlines, that the entire industry is going to be stuck on the tarmac by Thanksgiving. But far from all the chatter about bankruptcies and cutbacks, a few enterprising carriers are quietly soaring. Discount pioneer Southwest is readying its first transcontinental flights, from Baltimore, Md., to Los Angeles, starting this fall, while New York City-based upstart JetBlue is adding more flights on the West Coast and in Florida. These and other discount carriers today account for 20% of domestic air travel, up from 10% in 1992.

So why haven't American, United, US Airways and the three other full-service carriers, which lost $11 billion last year and stand to lose an additional $5 billion this year, followed the lead of the profitable discounters by cutting costs and fares? Because that's not the way their business works. They have made, and lost, their money by providing the frequent departures, quick connections, spacious seats and other amenities that have been demanded by business flyers and charging them dearly for that service — more than five times the cost of a discount fare.

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It's no wonder, then, that since 9/11, which accelerated the worst downturn in U.S. aviation history, the major carriers have been whistling in the dark, waiting for their business to return to "normal." But with US Airways' move last week to seek bankruptcy protection, United's warning that it was sliding that way and American's announcement of "fundamental structural changes," the majors as much as admitted that they can't wait any longer for the friendly skies to return. They have to start building a new business model — one focused on both leisure travelers and the growing ranks of business travelers who are mimicking their penny-pinching ways.

Recent events underscore how much more turbulence lies ahead for the beleaguered carriers as well as the disgruntled traveling public. Fares will drop on some routes and rise on others. More direct flights could open up, even as layovers grow longer at airline hubs. Satellite airports (Baltimore; Long Beach, Calif.) near metropolitan areas could see more traffic while service is reduced to smaller cities like Syracuse, N.Y., and Greensboro, N.C. And forget those promises of more legroom in coach. Those days are over.

Rather than cause brief setbacks to the airline industry's fortunes, 9/11 and the recession exposed a raft of deeper problems: high fixed costs, a convoluted fare structure, a boom in online bargain hunting by consumers and the growing disaffection of business travelers and their bosses. The full-service airlines' soak-the-rich business model, which has always prized maximizing revenue over operational efficiency, looks all but busted.

Rebuilding it will be wrenching for an industry that collected a record $22.7 billion in profits from 1995 to 2000. With the country enjoying an unprecedented economic boom, corporate travel managers were willing to pay the $2,000 walk-up fares for New York to Dallas or San Francisco to Miami. So it didn't matter how many vacationers were snapping up $400 deals to fly to Hawaii. From January 1996 to December 2001, business fares rose 75%, according to American Express Corporate Travel.

But 9/11 and the recession changed everything. At first, it was not so much the fear of a terrorist attack as the worry of being stranded far from home that crimped air travel. Long waits at security checkpoints took their toll. Companies sought alternatives — driving and taking Amtrak; doing business by phone and e-mail or via better-quality and lower-cost videoconferencing technologies — and found they weren't so bad, especially since they helped cut costs. When they did fly, business travelers and their bookers joined leisure travelers in seeking the best deals on the Internet, even if that required planning trips further in advance. And firms learned to rely more on private charters or fractional jet ownership for their top executives, who had been the airlines' most lucrative customers.

The result: business travelers, who make up just 10% to 15% of all passengers, accounted for only 23% of total airline revenues in 2001, down from 35% in 1999, according to a McKinsey & Co. report. At the same time, total domestic passenger traffic has been falling at an annualized rate of 7%, after growing 4% annually for the previous decade. "Four-figure business fares are like heroin to the airlines. They're addicted to them, but they're bad for their health," says Richard Aboulafia, an analyst for the Teal Group, an aerospace and defense consulting firm in Fairfax, Va.

Even when the economy starts to grow again, it's hard to see business-travel revenue returning to its boom-time levels. The economy, after all, is unlikely to be cruising along at the breakneck pace of the '90s. Overall, business travel has fallen more than 20% since 2000, according to the Business Travel Coalition. As many as 80% of road warriors surveyed by the coalition plan to trim air travel even more this year, and nearly three-quarters think some of the cutbacks will be permanent. Phil Condit, CEO of Boeing, has said that at least 10% of the peak business-travel demand could be gone forever. No wonder the S&P Airlines Index is off 37% this year, double the decline in the broader stock market.

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