Legacy airlines that have thrown their business plan eggs into the international travel basket may soon be feeling a big profit pinch. No, low-cost carriers aren’t coming into the system to push prices lower. Fewer businessmen and vacationers are flying intercontinentally.
For the past two years or so most of the US legacy airlines have been increasing international routes as they merrily slashed domestic capacity. Those moves are coming home to haunt them as the economic contraction continues.
Growth in the international part of the airline traffic pie has been the only growth play over the past few years, however, that part of the pie is now shrinking. The International Air Transport Association, earlier this week, announced that it expects worldwide passenger air traffic to drop 3 percent in 2009.
This clearly portends pressure on the airlines’ bottom lines especially for Continental, Delta and United, which have been the main proponents of rapid international expansion.
Only last week Delta announced a major international expansion and their profit projections for the recently completed merger with Northwest were based in a large part on the inclusion of Northwest’s lucrative route structure with the Orient.
American Airlines, rather than follow the herd with major international expansion, has actually pulled in their horns and delayed opening newly assigned routes to China until 2010.
Don’t forget the major investment that these airlines have been making in their first- and business-class cabins to appease the high rollers who are now being bailed out by the US Government. Since the government owns some of the banks and insurance companies that once were the main upscale clients of the legacy airlines, restrictions may be seen on first- and business-class travel similar to those regulating government travel.
Bottom line: The international routes that were once seen as a promising profit center for legacy carriers will this year become a drag on their profits. I expect to begin seeing more and more discounted seats creeping into the front-of-the-plane inventory as well as falling prices for many leisure international travelers. It’s already starting to happen.
Waiting in the wings: When the economic downturn passes, low-cost carriers will begin adding intercontinental routes that will limit the legacy carriers’ future pricing models.
Charlie Leocha is the President of Travelers United. He has been working in Washington, DC, for the past 14 years with Congress, the Department of Transportation, and industry stakeholders on travel issues. He was the first consumer representative to the Advisory Committee for Aviation Consumer Protections appointed by the Secretary of Transportation from 2012 through 2018.
