23 September 2008

The State of Airfares - Confusion Reigns Supreme

Air Travel is supposed to be one of the purest forms of market that exists anywhere. As such it should be driven by supply and demand - rising and falling accordingly.

Currently the fall in demand is acute - the fall in capacity has been even greater but so far we are not seeing corresponding rises in yield across the board.

We have therefore a number of factors. On the demand side clearly demand is falling - we believe that corporate/business demand is falling more rapidly. Willie Walsh has said that premium traffic is falling for BA faster than it expected. The meltdown in the US markets and the spreading virus has curtailed demand in many areas of high yielding business traffic. Those Wall Street and City types really like to travel in the front cabin. Well that business is WAY off. Generally the economy is falling so travel is being curtailed. I have always maintained that the amount of VFR traffic (Visiting Friends and Relatives) is far less discretionary than other forms. It also makes up a sizable portion of the US market and is not reported separately (unlike Europe and Asia/Pac where it is a recognized traveling segment.

Capacity domestically in the US market has been slashed but not enough. Capacity has been switched to International sectors which in turn has boosted capacity into a weak market particularly UK-USA as a result of Open Skies. One point of Domestic capacity shifted results in 8+ points if international capacity increase. As a result we are seeing drops in key markets. Topaz who tracks this sort of thing reports spot market yields off - such as Paris NYC. London-NYC etc.

Finally the impact of fees or ancillary revenue charges - inconsistent application of taxes (lets call this obfuscation) has resulted confusion on the part of the consumer who is not happy. Resulting in moving to more direct access.

We foresee a significant amount of price volatility for the next few months with increased "fire" sales and last minute revenue generating events. Peak travel times will actually see an increase in rates but off peak will plummet in pricing.

All in all - a very confused situation before Christmas. After the turn of the year - we will see a significant amount of breath holding and lack of forward commitment in advance bookings. This will take many months to sort itself out before easy and clear patterns emerge. Rest assured on the supply and intermediary side we are all in for a bit of a wild ride.

Cheers

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