The US leisure market appears to be taking up some of the slack left by the collapse in business traffic, and the majors are in hot pursuit
The summer season finally appears to have brought some welcome glimmers of hope for the beleaguered US air market, with domestic yields looking much firmer than they have for two years or more. But if there is room for a hint of optimism, then it has come not from a return of the traditional business traveller, whose disappearance had sent the majors into decline, but from an upturn in the leisure sector.
Wall Street analysts have already begun to track the apparent upward trend going into the peak summer months. Sam Buttrick, airline analyst for UBS, notes that unit revenues actually rose by 8% for the US majors in July, with "solid leisure demand" among the main drivers. Deutsche Bank analyst Susan Donofrio goes further in noting that going into the summer, leisure fares were showing growth of around 2% compared with a 5% decrease in business fares, and believes that the trend will continue the recent positive revenue momentum.
Leisure travel sector demand is "looking better now than it has for the last year and a half" says Michael Batt, president and chief executive officer of Carlson Leisure Group, a network of franchised leisure travel agencies with $4.5 billion in annual sales. He stresses, however, that pricing pressure probably means that the market is "static in cash terms" despite the headline growth.
Most marked is the upturn on travel to destinations closer to home. Recent research from the US Travel Industry Association suggests that the trend towards more regional and less intercontinental travel is being driven in large part by security concerns. Additionally, travellers are booking later, with a clear increase in the number of leisure trips booked within two weeks or less.
Batt reckons that, to guarantee a leisure-travel sale in the US mass market, an airfare has to be less than $350 and travel time for the trip under three hours. "That's why Florida does so well from New York", says Batt, himself a former marketing chief of British Airways.
US Airways is among those making the most of the trend, ramping up its offering from the US East Coast down to the Caribbean sun. "The lack of business travel revenue is an ongoing concern to the industry, so flying down to the Caribbean has become a more reasonable opportunity," says Doug Leo, vice-president for international, adding that the market is a natural one for US Airways. "It's natural for us to extend our network into the Caribbean to take care of our business travellers' vacation needs."
The carrier's Caribbean capacity has jumped 30% this year alone, and will experience "some growth" next year, he says. The airline flew to nine destinations in the Caribbean back in 2000 but by the end of this year will serve 24. Three years ago only 2-3% of the airline's capacity was on routes to the Caribbean and Latin America. This year it will come in at around 10%.
New US Airways Caribbean service is offered from its Philadelphia and Charlotte hubs, as well as from Northeast airports Pittsburgh, New York LaGuardia, Washington National and Boston.
And the carrier is not unique in adding service to the region. The busy July period saw the seats offered between North America and the Caribbean up 4.9% over July 2002 and seats to Central America, which includes Mexico, up almost 2%. This is against a global backdrop of seats offered falling by 1.2% and those between North America and the more business-orientated markets of South America plummeting almost 14% in the same period.
Later this year US Airways will also add new service to domestic leisure destinations such as Las Vegas (to be served on weekends from LaGuardia and Boston), and the Vail, Colorado, ski resort, which it will serve on weekends from Charlotte and Philadelphia.
Continental Airlines, too, has been raising its leisure offering, with flights to 21 Mexican and 14 Caribbean destinations. Dave Hilsman, the airline's vice-president of sales and reservations notes that it is currently the largest US carrier in Mexico. In addition to adding new destinations, it has increased capacity on some leisure routes, for example, upgrading routes from the Boeing 737 to the larger 757.
America West also has been busy expanding its leisure offerings south of the border. Besides the recent addition of service to Cancun in Mexico, the airline in December will begin serving San Jose, Costa Rica. America West should be particularly well positioned to take advantage of rising domestic leisure travel demand, as its two hubs - Phoenix and Las Vegas - are both popular vacation travel destinations.
America West is not alone among low fare carriers in focusing on the USA-to-Mexico leisure network. Denver-based Frontier Airlines will begin three routes to Mexico resorts by year-end, adding to its two Mexico routes begun in late 2002.
Miami-based Bobby Booth, a noted consultant on Latin American aviation, believes the potential presented by both the Caribbean and Latin America is incredible. "Less than 50% of the total market between the USA and Latin America is composed of US citizens; it should be closer to 70% and that would represent 1.5 million annual passengers", he says, adding: "As Americans look south and into the Caribbean, we will see a major change in the nature of leisure travel. Latin America is still the 'sleeping giant', but I believe that market forces will change all of this".
There is growth too beyond Latin America with Continental expanding its service to Hawaii by launching new flights between Houston and Maui and increasing frequencies on the Houston-Honolulu route. Hawaii, in fact is enjoying a resurgence, as Northwest and Delta Air Lines each plan more service there from the US mainland, including the first non-stops between Honolulu and both Atlanta and Cincinnati, both of which will be operated by Delta.
Many airline marketing executives say they are tailoring their pricing and products to the demands of various leisure travel customers and distributors. These include: cruise lines selling vacation packages; tour operators; individuals visiting friends and relatives; online travel companies; and the airlines' own Web sites, through which they sell deeply discounted tickets that change weekly; and frequent flyers.
In fact, Dan Garton, American's executive vice-president of marketing, explains that fare sales on leisure routes have largely become pass‚, except perhaps when new destinations are introduced with discounts to stimulate business. "In the past, we have used ticket sales as a way to try and motivate purchase, but when the low-cost competition has every-day low pricing in the market, that tactic becomes irrelevant", Garton says.
Donofrio, the Deutsch Banc analyst, says that financially weaker carriers such as American have gone along with leisure fare increases more than was traditional. Low-cost carrier competition, however, remains a restraint on any upward fare trend. Garton says that low-cost competitors have already "taken our customers from us" and now account for some 25% of market capacity. In response, the majors have to be "very competitive from the schedule and price standpoint" he adds.
"Discount carriers are on the offensive, network carriers on the retreat," says JP Morgan airline analyst Jamie Baker. "More often than not, discount carriers provide more frills than their so-called full-service competitors. Network executives may consider schedule breadth and lounge access to represent full-service, but in the minds of many leisure travellers, it's about low fares, television and a friendly in-flight crew".
Delta has designed its low-cost Song operation expressly to cater for such leisure flyers. It began flying in April with one aircraft and is slated to have 36 one-class, 199-seat 757s in its fleet by the end of this year. Replacing Delta Express in the Northeast-Florida market with what aims to be a lower cost structure, Song is particularly targeting female leisure travellers, age 36 to 54, who purchase trips for their families, says Joanne Smith, Song's vice-president of marketing.
"We hope we can differentiate the brand on the basis of style, entertainment and a wellness platform", she says. When its aircraft are fully equipped with in-flight entertainment, Song will offer onboard digital television and pay-per-view movies, as well as the on-board sale of food, ranging from a "signature" martini to vegetarian tacos and organic yoghurt.
"We are encouraged that first-quarter yields were up over last year in the leisure markets Song serves, and the leisure travel outlook - based on research currently in the marketplace - is positive," says Smith, while more traditional carriers too express guarded optimism as the US economy starts to gain pace. "We would expect actual revenue potentially to track any increase in the economy," says Garton.
Carlson's Batt is even more bullish. "The underlying growth drivers are very solid," he says, singling out an ageing population with increased disposable income, as well as general "increased interest" in travel as the world becomes more global and "people become more adventurous".
REPORT BY JANE LEVERE IN NEW YORK
Source: Airline Business