Demand May Be Finally Bottoming Out, But Revenue Trends Still 'Awful'

Has demand for air travel become as bad as it is going to get? There has been lots of discussion on the subject and lots of data cited to both support and refute an ongoing recovery, but according to a May 18 research note from J.P. Morgan North America Equity Research analyst Jamie Baker, "April data appear to support the now widely accepted view that the pace of demand deterioration continues to slow and may in fact have stopped for some."
The Air Transport Association of America reported that U.S. airline traffic dropped 10 percent in March versus a year earlier. At that time, ATA president and CEO James May said, "While the industry faces demand uncertainty as we head into the summer, we certainly would like to believe that we have seen the low point." Perhaps we have. ATA said April passenger traffic fell less dramatically, at 6.3 percent.

Systemwide, the five international network carriers experienced April traffic declines between 3 percent (US Airways) and 8.7 percent (United Airlines). In the domestic market, United also was down most, 11.5 percent. Most other major carriers were down between 5 percent and 8 percent. AirTran (0.3 percent) and Southwest (4.1 percent) were the only ones growing.

Such traffic data directly from the airlines has shown a mild improvement (i.e. their traffic trends are less bad), as have ARC numbers. Based on U.S. travel agency data (which excludes such consumer-direct channels as sites), total transactions in April were down 12.3 percent year over year, the smallest decline since January's scary 23-percent plummet. Transactions among the 10 largest travel agencies, however, were down 27 percent, a steeper drop than in both February and March.

We'll see what May demand data brings next week when carriers start reporting monthly statistics, but revenue trends remain "awful," wrote UBS Investment Research analyst Kevin Crissey in a May 22 research note. "The definition of 'awful' varies by airline based mostly on their international business versus domestic leisure mix. International premium cabin revenue remains practically non-existent."

Referring to poor May unit revenue commentary from eight airline management teams UBS hosted in New York on May 22, Crissey asked, "You call that stabilizing? Based on our industry sources and conversations with the carriers we believe May passenger unit revenue for the industry will be down about 18 percent. Business-heavy carriers, such as United and Continental, are likely to be down more. Unfortunately, recent booking data and management comments suggest June unit revenue will be down a similar amount.

"Airline revenue trends are every bit as bad as after Sept. 11 and large losses by most of the network carriers are likely," Crissey continued. "So when will capacity cuts for the post-Labor Day period be announced? We suspect within a month but are concerned that the scale of the cuts will be inadequate."