US carriers are preparing for a drop in premium revenues as the economic downturn is forcing those passengers to transition to the back of the aircraft.
Corporate cutbacks are resulting in empty seats in first and business class. But both United and Continental believe the configuration of their respective long-haul aircraft fleets supply a shield against waning demand.
Some carriers such as United started seeing a softening in premium demand as early as the spring of 2008.
United's premium demand plummeted 25% year-over-year during the fourth quarter, said chief operating officer John Tague during a recent analysts call. But he believes the reconfiguration of the carrier's widebody aircraft with premium lie-flat seats gives the carrier an advantage as demand continues to soften.
Once the reconfigurations are complete, United's premium seating levels should fall by 20%. United expects to complete the installations on it Boeing 767 fleet by the second half of 2009, followed 747 installations later in the year. The carrier is targeting completion on its 777 fleet in late 2010.
Continental describes similar demand declines, highlighting "a significant degradation of front cabin revenue per available seat mile (RASM), with a combination of lower front cabin yields and load factor", explains carrier chief operating officer Jeffery Smisek.
For Continental the "back cabin is holding up much better", says Smisek, "as many international business travelers appear to have shifted their flying from the front to the back". But he warns higher demand in economy is not compensating for the fall in premium demand.
"This is a time when we're grateful for our relatively lower percentage of business first seats versus coach seats compared to our competitors," says Smisek. "Or put another way, we're really grateful to be flying so many 757-200s to Europe."
Continental expects decreases in load factors in all international regions during the current quarter, with the carrier's transatlantic suffering the most with a six point decline.
The carrier is taking typical measures to combat weak demand including frequency reductions, equipment downgrades, seasonal cuts, day of week reductions and market exits.
Still Continental chief executive Larry Kellner remains bullish about the carrier's international offerings telling analysts overall the business continues to perform well, "it just isn't as good a business as it was earlier".
Delta predicts similar declines in international demand during the first quarter as president of its Northwest Airlines subsidiary Ed Bastian tells analyst book load factors are down seven-to-nine points for the February and March periods. Echoing Continental, Delta's Bastian says Transatlantic markets account for the majority of the weakness "especially connecting financial centres like JFK to London".
The sagging demand is not a shock to these carriers as Bastian explains the data points "are within our expectations for this environment". But he admits a challenge in predicting further declines. "We just don't know where to predict the bottom of the recession is going to hit but we're utilising all the levers that we can".
American's fourth quarter international performance contrasted its peers as chief financial officer Tom Horton says the carrier achieved an aggregate 6% growth year-over-year "with yield increasing more than offsetting load factor declines".
Unlike Continental and Delta, American's Atlantic fourth quarter unit revenues grew 3% on a 3% capacity reduction. The carrier's unit revenues in the Pacific jumped 11%.
But American is not sustaining that performance into the first quarter as Horton says mainline international book load factors are down roughly eight points.
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Source: Airline Business