david grossman june 17, 2009 business travel outlook for 2009: uncertain, tumultuous times copyright...
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David Grossman
June 17, 2009
Business Travel Outlook for 2009:Uncertain, Tumultuous Times
Copyright 2009 by David Grossman
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 2
Business Travel in Tumultuous Times
2009
Economic Crisis2008
Oil Crisis
What does it mean for business travelers?
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 3
The Recession of 2009Declining Travel Demand
Airline Passenger Traffic Falls
March 2009 vs. March 2008• -10% U.S. • -11.1% International
April 2009 vs. April 2008• -3.1% International
Source: Air Transport Association (ATA)
International Air Transport Association (IATA)
From the Airline Perspective:
“This is the most difficult situation
the industry has faced. After
September 11th, revenues fell by
7%. It took three years to recover.
This time we face a 15% drop.”
--Giovanni Bisignani, Director General,
International Air Transport Association
June 8, 2009
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 4
From the Airline Perspective:
“Things have certainly not
improved. It would be foolish to
think that things are going to get
better anytime soon.”
--Gary Kelly, CEO, Southwest Airlines,
speaking at AAAE Meeting June 15, 2009
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 5
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 6
The Recession of 2009International Business Travel Decline
• Premium (first and business class) passengers declined by approximately 18%
• Economy class passengers down by 8.3%
Source: IATA Premium Traffic Monitor Feb 2009
(Feb 2009 vs. Feb 2008)
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 7
The Recession of 2009Business Travel Decline
• Passenger traffic across the Pacific to Asia declined by 27.3%
• Passenger traffic across the North Atlantic fell by 22.5%
Source: IATA Premium Traffic Monitor Feb 2009
(Feb 2009 vs. Feb 2008)
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 8
Most corporate buyers have cut spending 20% to 30% since the beginning of the recession
-- David Meyer, Editor in Chief, Business Travel News
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 9
The Recession of 2009Corporate Travel Departments React
• Meetings, particularly internal, take hit• Increased demand management• Travel policy changes• Some corporations downgrading
– Business/first class to coach– Lower hotel class
• Increased use of virtual meetings
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Many business travelers are chained to their desks
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Road warriors become conference call warriors
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June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 13
The “AIG” Effect:“fun” destinations take biggest hit
Some meetings move to urban business centers
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 14
The Recession of 2009Travel Suppliers React to Shrinking Demand
• Airlines cut capacity/ground planes• Airlines and hoteliers slash prices• Some hoteliers reduce amenities• Some hoteliers charge for amenities or
services formerly included in room price• All suppliers pursue business travelers
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 15
Source : Air Transport Association
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 16Source : Air Transport Association
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 17
Capacity Cuts vs. Slumping Demand(Change year/year Jan-May 09/08)
Fewer Seats for Even Fewer Passengers
Avail Seat Miles
Rev Psgr Miles
Load
Factor
Psgrs Flown
AA -7.8% -10.5% -2.4% -10.6%
CO -7.5% -8.7% -1.1% -11.5%
DL/NW -6.9% -9.2% -2.1% -8.9%
UA -11.9% -14.4% -2.3% -16.2%
US -3.4% -5.2% +0.5% -7.8%
WN -3.5% -2.2% +0.9% -6.8%
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 18
Some New Capacity Cuts
Announced Last Week
• AA domestic from 6.5% to 7.5%
• AA international from 5.5% to 15% over past two years
• DL domestic from 6%-8% to 10%
• DL international from 10% to 15%
• FL will cut 7%-8% in 2Q09
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 19
Local Impact of Capacity Cuts (July 09/July 08)
• -6.9% Pennsylvania – State (26th highest)• -6.9% National Avg. (@ 300 airports)• -5.1% PHL• -1.1% ABE• -.6% MDT• +1.6% AVP
Source: USA Today/Official Airline Guide
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 20
PHL Enplaned Passengers
Source: DOT Statistics
x 1,000
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 21
Capacity Cuts: Who Loses?
• Smaller communities
• High frequency routes
• Smaller, redundant hubs
• Leisure/vacation destinations
• Secondary airports in large cities
• Competitive routes with multiple carriers
• Communities served by smaller regional jets
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 22
Capacity Cuts Impact Secondary
Airports in Multiple Airport Cities
Source: USA Today/Official Airline Guide – July 09 vs. July 08
OAK -19%
SJC -16%
SFO -3%
BOS -3%
MHT -15%
PVD -9%
FLL -11%
MIA -2%
PBI -11%
BUR -14% ONT -18%
LAX -7% SNA +1%
LGB -8%
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 23
Smaller Hubs in Top 15 Capacity Cuts
• 24.3% Cincinnati (DL)
• 18.1% Cleveland (CO)
• 15.2% Pittsburgh (US)
• 12.3% St. Louis (AA)
Source: USA Today/Official Airline Guide
6.9% nat’l avg. July 2009/July 2008
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 24
Impact of Capacity Cuts
• Fewer options for business travelers
• Increased travel times
• Longer waits
• Canceled flights
• Longer drives to smaller
communities
• 87 smaller U.S. airports lost all
commercial service in 2008(Source: Air Transport Association)
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 25
Additional Impact of Capacity Cuts
• New aircraft orders deferred
• Squeezing into smaller aircraft– A319 Transcons
– RJs on BOS/NY/DC
shuttles
– Narrow body 757s on
transoceanic flights
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 26
The Bright Side of Capacity Cuts
• Fewer flight delays
• Fewer cancellations
• Fewer lost bags
• Older aircraft retired
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The International Party is Over
Capacity cuts are not limited to domestic flights
In last few years U.S. airlines moved 10% to 15%of capacity to international markets to avoid LCCs and capitalize on global economic boom
Now airlines are shrinking internationalcapacity in global economic crisis and deferring start of new hard-fought routes
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June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 29
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 30
International Capacity CutsAirline Year/Year
AA (-5.9%)
CO (-0.5%)
DL (-6.9%)
NW (-15.4%)
UA (-8.2%)
US +14.8%
AF (-4.1%)
BA (-0.6%)
LH (-3.8%)
Seats from U.S.to foreigndestinationsMar 09/Mar 08
Source: USA Todayand Official Airline Guide
The international
party is over
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 31
Will Capacity Cuts Last?
• Low Cost Carriers (LCCs) traditionally move to fill the capacity void
• In 2008 $150/barrel forced LCCs to abandon growth and enter survival mode
• When oil prices dropped to $50-$60/barrel LCCs resumed expansion
• In recession price matters to the customer – travelers purchase the cheapest ticket
• Continued LCC growth depends on oil prices
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 32
Does slumping travel demand
translate to lower airfares?
The Recession of 2009
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 33
Air Fare Ups and Downs
Plummeting travel demand has reversed
the two year cycle of fare increases
• 2007: 17 successful fare increases
• 2008: 15 fare hikes through July
• 2009: more than 25 fare sales(Source: FareCompare.com)
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 34
Air Fares Decline
(June 2009 vs. June 2008)
U.S. national average ticket
• $275 is 19% lower than $339
Average ticket price for PHL
• $270 down 14% from $314
Source: Farecast.com
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 35
Philadelphia Air Fare Trends in 2009
• Highest average air fare was $272 as of
June 14th
• Lowest average air fare was $216 in
early January
• Average fare rose 19% from $226 on
January 1st to $270 on June 15th
Source: Farecast.com
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 36
Source: Farecast.com
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 37
Philadelphia Air Fare Trends(June 2009 vs. June 2008)
Top Losers
• PHL-CLT down 50%
• PHL-CLE down 34%
• PHL-SAN down 31%
Top Gainers
• PHL-JAX up 22%
• PHL-TPA up 11%
• PHL-CMH up 11%
Source: Farecast.com
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 38
International Premium Seat Glut
Premium ticket prices declined by 6% in 2008(Source: IATA)
The international business class seat glut
caused by:
• Recession
• Stronger U.S. dollar
• Business travelers downgrading to coach
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 39
International Premium Seat Glut
Business Class Bargains Abound
• NYC-LON $1,829
• IAD-MOW $2,519
• LAX-SEL $2,602
• LAX-SYD $4,089
Source: Orbitz.com
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 40
Capacity Demand
It all depends on capacity vs. demand
Will Air Fares Remain Low?
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 41
Air Fares Will Stay Low or Decline if:
• Oil prices remain low
• Travel demand continues to soften
• Capacity cuts can’t keep pace with
slumping demand
• LCCs continue expansion
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 42
Will airlines reverse their move to a la carte (unbundled) pricing?
•Checked bags
•Seat selection
•Food/Drink
•Headsets/Entertainment
•Pillows
•In-Flight Wifi…and more
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 43
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 44
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 45
Airline addiction to surcharges and ancillary fees
• JP Morgan Chase says new fees will generate $3 billion annually
• UA projects $1.2 billion from fees in 2009• Continental is the lone airline still serving free meals in coach• Only Southwest has refrained from adding most fees…so far• Fuel surcharges are the most likely fee to go …until fuel prices
rise again
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 46Source: Air Transport Association
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 47
2008: Red Ink Returns
Airline Net Loss x $1m Cash x $1b Debt x $1b
WN $178 $2.0 $3.7
B6 ($76) $.8 $3.2
FL ($274) $.3 $.9
CO ($585) $2.6 $5.8
AA ($2,071) $3.6 $15.1
US ($2,210) $3.0 $4.0
UA ($5,438) $2.3 $6.8
DL/NW ($8,922) $6.1 $16.6
Totals ($19,398) $20.4 $55.2
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 48
1Q 2009: Red Ink Continues for Network Airlines
Airline Net Loss x $1m Cash x $1b Cost/Seat Mile (cents)
US ($103) $2.1 11.1
CO ($136) $2.7 10.6
AA ($375) $3.6 11.8
UA ($579) $2.5 11.1
DL/NW ($794) $5.0 11.7
Totals ($1,987)
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 49
2009 Airline Industry Loss Projections
Region x $1b
North America $1.0
Latin America $.9
Europe $1.8
Middle East $1.5
Asia-Pacific $3.3
Africa $.5
Totals $9.0
IATA doubled
projected loss
last week
U.S. airlines already lost $2b in 1Q09
How long can they last?
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 50Source: Airline Weekly
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 51
1Q 2009: Red Ink Around the World
Airline Net Loss x $1m
AF/KL ($656)
BA ($525)
LH ($332)
easyJet ($130)
Ryanair ($190)
Airline Net Loss x $1m
ANA ($137)
JAL ($616)
KE ($413)
MH ($199)
SQ $43
Source: Airline Weekly
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 52
1Q 2009: LCCs Recover with Lower Fuel Prices
Airline Net Loss x $1m Cash x $1m Cost/Seat Mile (cents)
WN ($91) $2,100 10.0
B6 $12 $634 9.1
FL $29 $315 9.2
F9 ($161) $70 8.5
VG ($40) $38 9.5
If oil prices continue to rise LCCs will be forced to scrap expansion plans and raise fares to survive
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 53
Low Cost Carriers Are Growing Again
• AirTran: Allentown, Asheville (NC), Atlantic City, Branson (MO), Charleston (WV), Harrisburg, Knoxville, Portland (ME), building hubs in MCO and MKE
• jetBlue: Barbados, Columbia, Costa Rica, Jamaica, LAX, Saint Lucia, SFO
• Southwest: BOS, LGA, MKE, MSP, code share to Canada and Mexico
• Virgin America: BOS, LAS, SNA – nine destinations in first two years of operation
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 54
Southwest’s Oil Hedge Problem
69 consecutive profitable quarters, now 3 losses
4Q08 would have been +$61m without hedges
Southwest is dumping fuel hedges, but still has
nearly $1b in liability.
2006 2007 1Q08 2Q08 3Q08 4Q08 1Q09
$499 $645 $37 $529 ($205) ($83) ($91)
Profit / (Loss) (x $1 million)
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 55
Southwest’s Oil Hedge Problem
When oil prices were high
Southwest made money
because they were still
purchasing fuel at 33%
of the market price
…an ingenious strategy…
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 56
Southwest’s Oil Hedge Problem
Year Hedged Hedge Price2005 85% $26
2006 73% $36
2007 95% $50
2008 70% $51
2009 75% $73
2010 50% $90
2011 40% $93
2012 35% $90
Southwest kept
other airlines
prices in check
…that allowed Southwest to make money
while others couldn’t.
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 57
WN Pursues Business Travelers
• Priority boarding for full fare customers• Families board later• Drink coupons for full fare customers• Power/USB hookups in gate areas• No change fees or other fees• Pursuing business destinations• Using major airports• Galileo distribution arrangement• WestJet and Volaris alliances
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 58
Southwest Airlines Continues to Grow Mkt Entry
DateMkt Share 12/06
Mkt Share 3/09
Current Rank
PHL 2004 12.1% 14.8% 2nd
PIT 2005 11.6% 17.4% 2nd
DEN 2006 3.5% 11.7% 3rd
IAD 2006 -- 4.5% 5th
SFO 2007 -- 7.8% 3rd
BOS 2009 -- ??? ???
LGA 2009 -- ??? ???
MKE 2009 -- ??? ???
MSP 2009 -- ??? ???
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 59
Next for Southwest?
• Rapid expansion at BOS, DEN, LGA, MKE, MSP, SFO
• Entry into Northeast shuttle market
• Entry into CVG and MEM as Delta refocuses after NW absorption
• ATL and CLT – it’s only a matter of time
Oil Prices on the Rise Again
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 60
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 61
Network/Legacy Airlines Still Disadvantaged
• Even with capacity cuts, ancillary fees, and fare hikes of the last two years network/legacy airlines are still losing money in the global recession
• Even after bankruptcies and restructuring network/legacy airlines still have higher cost structures than LCCs
• LCCs are driving prices down again
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 62
Airline Fleet Types
WN 1
FL 2
B6 2
CO 4
AA 6
UA 6
US 6
DL + NW 9 or 10
Even after bankruptciesand years of cost cutting,LCCs still have cost advantage over legacy airlines with multiple aircraft types
Excludes commuter affiliates and regional jets with <90 seats
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 63
The Aging U.S. FleetAirline Years
jetBlue 3
AirTran 4
Southwest 10
Continental 10
US Airways 12
United 13
Delta 14
American 15
Northwest 18
A problem that
will outlast
the recession
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 64
Likely Candidates for Retirement
Airline Aircraft Type # in Fleet
Avg Age
(Years)
DL/US 757-200 163 16-18
AA/DL MD80 417 18
CO/UA/US 737-(200-500) 248 16-20
AA 767-200 15 21
NW DC9 94 36
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 65
Other Aviation Trends
• Consolidation (particularly in Europe, LCCs)• DL/NW “realignment” (downsizing)
• Open skies
• Alliance switching
• Long range aircraft over-flying traditional hubs
• Center of commerce shifts east
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 66
Over-flying Traditional Hubs
• New aircraft allow super long flights• New non-stop routes:
– JFK, IAH, SFO, LAX to Dubai– JFK to Abu Dhabi– IAD to Doha– ORD to Delhi– JFK to Mumbai– SFO to Bangalore
• The losers will be AMS, CDG, FRA, and LHR
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 67
U.S. Hotel Industry Metrics
April 2009 Change
Avg Rate/Day $98.37 (-9.4%)
Occupancy 56.4% (-11.1%)
May 2009 Change
Existing Rooms 4,744,971 +3.1%
In “Pipeline” 522,778 (-22.2%)
Source: Smith Travel Research (year over year))
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 68
Hotel Industry Metrics
• Bookings down 3% in 4th quarter 2008*
• NYC hotels selling for <$125/night*
• Rising hotel participation in Priceline distressed
inventory booking product
• Global hotel prices dropped by 12% last year**
Sources: Carlson Wagonlit Travel*, Priceline and Hotels.com**
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 69
U.S. Hotel Projections
2009 2010
Avg Daily Rate (ADR) $102.89 $104.41
ADR change Y/Y -3.6% +1.5
Occupancy Rate 56.5% 56.5%
Source: Smith Travel Research (STR) (April 2009)
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Hotel Trends
• 1 less air booking = .4 fewer hotel stays*
• Luxury brands hurting as
more travelers downgrade
• Some hotels are removing amenities from
rooms, coffee, snacks from lobby, etc., and
charging for Internet access*Carlson Wagonlit Travel and Pegasus
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 71
The Problem With Car Rental Rates
Rental cars should lose
customers proportionately
to air and hotel, but any
savings may be buried
in taxes and fees assessed
in many cities
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 72
Travel Industry in Recession:Open Questions
• Are business trips postponed or lost?• Are increased webinar, video, conferencing
permanent changes?• Is downgrading policy permanent?• Will capacity keep pace with demand?• Will prices stay low or decline more?• Will business travel recover before the
recession is over?
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 73
Recommendations in a Recession
1. A good time to travel if you have funds
2. Renegotiate corporate contracts
3. Consolidate meetings spend in travel dept.
4. Practice demand management
5. Reduce travel for internal meetings
6. Use more computer/teleconferencing
7. Watch for last minute specials and price reductions and seek credits and refunds
June 17, 2009 Outlook for Business Travel in 2009 Copyright 2009 David Grossman 74
Recommendations in a Recession
7. Leverage preferred relationships
8. Avoid ancillary fees with WN, elite status, packing light
9. Stay at hotels with free breakfast, Internet access, business center, parking
10. Consolidate multiple stops on one trip
11. Encourage more day trips
12. Strong $ dollar = bargains abroad
David Grossman
June 17, 2009
Business Travel Outlook for 2009:Uncertain, Tumultuous Times
Copyright 2009 by David Grossman
Questions?