Offsetting Trends To Keep 2017 Airfares About Flat In North America

By | September 15, 2016

[UPDATE: June 28, 2017: BCD Travel’s Advito slightly raised several of its 2017 airfare projections, owing to strong global demand and improving economic conditions. It also increased to $52 per barrel from $50 its assumption for the price of oil, due to geopolitical tension. “Efforts by airlines to push up prices have so far had only limited success,” Advito reported. “But fares may soon start to slowly trend upwards.” For North America, the consultancy now expects intercontinental economy fares to rise on average this year by 1 percent versus 2016. It previously forecast no change. It also adjusted upward by one percentage point intercontinental economy fare projections for Europe (now a 2 percent year-over-year increase) and Asia (now a narrower 1 percent decline). Noting capacity additions, Advito went the other way for regional business fares in Latin America, now projecting a 1 percent decline after originally calling for no change.]

U.S. airfares have been falling this year, just as they did last year. According to three forecasts published by travel management companies, that will change in 2017, but not by much. In North America, a combination of drivers likely will keep pricing stable.

The demand outlook is uncertain. Low-cost carriers are expanding domestic U.S. and transatlantic services. Fuel prices still are relatively low. These factors apply downward pressure on airfares.

However, crude oil prices have crept up this year and are expected to rebound further next year. Big U.S. carriers aren’t adding much new capacity. Some airlines say close-in corporate demand is fine. These indicators suggest rising prices.

The net result in North America, according to forecasts by BCD Travel’s Advito and Travel and Transport, is little to no change for expected 2017 corporate airfares. A Carlson Wagonlit Travel/Global Business Travel Association forecast issued in July called for a 3.7 percent increase.

Noting that load factors in the United Sates are above 80 percent, CWT Solutions Group Americas senior director Yon Abad said carriers “are in a very good position” to push pricing. Despite “a lot of competition,” he said during GBTA’s summer conference in Denver, “I think we can trust the U.S. airlines will find a way to increase fares next year.”

airfares

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As always, capacity is a primary consideration. Advito noted that American, Delta and United “have scaled back planned capacity growth for the rest of 2016 in a bid to maintain or grow average fares.”

After rising 5.7 percent in the first half of this year, Delta’s capacity growth will slow to 2.5 percent in the second. Its transatlantic capacity for winter 2016-2017 will be down for a second consecutive year. It cited demand impacts from violence in Paris, Brussels, Nice, Istanbul and Munich.

Southwest said it plans to increase 2017 capacity by less than 4 percent overall (2 percent on domestic U.S. routes). That’s down from this year.

“The modest domestic growth is encouraging for industry load factor and unit revenue,” according to Cowen analysts. “We expect load factors to improve and yields should follow. Southwest has historically been considered the U.S. domestic price-setter, so if fares improve for Southwest, they should improve for the industry.”

Fuel is another key element. Jon Gray of Rockport Analytics said he’s expecting oil prices to increase by about $10 per barrel next year. “That should help give a bit of rise to airfares in 2017,” he said during the GBTA conference.

The U.S. Energy Information Administration anticipates about the same for crude oil. As of Sept. 7, its estimate for 2016 Brent crude is an average of $43 a barrel, rising to $52 in 2017. By the fourth quarter of next year, EIA predicted, the average price will hit $58 a barrel.

Advito’s forecast assumes an average 2017 oil price of $50 a barrel.

Planning for higher fuel prices “is the healthiest way for us to run the business and plan the business going forward,” said Delta CFO Paul Jacobsen during a Cowen conference last week. “It leads to cost discipline and more capacity discipline internally.”

Fare Foils

Demand uncertainty, especially from business travelers, is a bit of a drag on airline outlooks. In a Sept. 9 financial filing discussing an expected third-quarter unit revenue decline as steep as 7.5 percent, United Airlines wrote that performance “is primarily impacted by demand growth not keeping pace with capacity growth, soft close-in yields, competitive actions and travel reductions in the energy sector.”

The degree and duration of the uncertainty this year is somewhat tied to the presidential election, according to Advito:

“This November’s election is uniquely unpredictable. If Donald Trump wins, businesses will likely put investment on hold as they await more detail on his policies. This will inevitably temporarily weaken business travel demand. Inbound travel could also be hit by this uncertainty around Trump’s foreign policy. On the other hand, if Hillary Clinton wins, the period of uncertainty is expected to be much shorter, and the risks to demand lower.”

More clear is the deeper penetration of low-cost carriers. Though Southwest is slowing growth in the domestic U.S. market, Spirit Airlines isn’t. The carrier expects full-year 2016 capacity to be up more than 20 percent. “The Big Three are paying close attention to the threat posed by this rapid expansion and fighting back on two fronts,” according to Advito. That’s by upgrading from older regional jets to newer, bigger planes and offering bare-bones basic fares.

Spirit has raised fares a few times this year, according to JP Morgan analysts. “While Spirit’s domestic footprint may appear diminutive, its pricing impact is disproportionately material given it publishes some of the most problematic fares in many of the nation’s largest markets,” they wrote in a Sept. 2 research note.

There’s also been an influx of low-fare competition across the Atlantic.

Norwegian Air Service, for example, already flies 37 nonstop routes between the United States and Europe. That’s more than any other European carrier. New Paris services started this summer. Four routes to Barcelona start June 2017.

“Low-cost, long-haul services have tripled across the Atlantic since 2014 and with only a current 3.3 percent share, there is clearly room for more,” according to OAG. “WestJet’s ambitious launch of six Canadian destinations to London Gatwick appears to be delivering better than expected load factors. Reykjavik is now firmly established as a low-cost hub for both Icelandair and Wow.”

It’s not just low-cost carriers. OAG noted more transatlantic flights by Aer Lingus, Airberlin, SAS and TAP Air Portugal.

“There is too much capacity in virtually every [intercontinental] market,” according to Advito. “In some intercontinental markets, like Africa, the Middle East and Southwest Pacific, capacity growth will ensure that business fares do not rise at all.”

Given macroeconomic sluggishness in Europe, all of the new supply across the Atlantic poses a particular challenge to U.S. carriers.

“We see continued weakness in the transatlantic — capacity-driven and to some extent demand-driven in terms of some of the economic uncertainties,” said AA chief integration officer Bev Goulet yesterday during a Morgan Stanley conference. She also pointed to excess capacity and therefore revenue weakness on Pacific routes. Goulet contrasted those challenges with domestic, close-in demand, which unlike United’s, is looking “pretty good” for AA.

Mixed messages from the market don’t make travel budgeting easy for corporate buyers. As always, expectations vary by market.

“Overall, upward and downward pricing pressures are likely to cancel each other out,” Advito concluded. “Airlines are expected to test the market with fare hikes to see what customers will accept, and they’ll become less generous with ‘waivers and favors.’ If oil prices start moving upwards again, as they did earlier in 2016, carriers should be able to withdraw aircraft much faster than in the past and fares could quickly rise.”

Additional info: Advito for North America predicted 1 percent average increases for intercontinental and regional business fares. It expects intercontinental economy fares to drop back 1 percent and regional economy fares to show no change. For all four fare types, Advito tracked lower average prices in every month between October 2015 and June 2016.

Travel and Transport Partner Solutions Group projected base fares overall to rise about 1 percent in North America.

According to the CWT/GBTA forecast, 2017 corporate fares will increase 3.7 percent in the United States. Specific projections for domestic, continental and intercontinental business and economy fares all are within two-tenths of a percentage point. By market, it expects the largest fare increases in Boston (4.9 percent) and San Jose (3.8 percent). The only market where it expects a drop is Washington (down 1.3 percent). The predicted global average increase is 2.5 percent.

Southwest’s average one-way fare during the first half of 2016 was about $153, down 3 percent year over year. JetBlue’s was near $158, down about 8 percent.

According to Topaz International, the average cost of clients’ domestic passenger name records during the first eight months of this year was $469. That was down from $497 in the same period last year. For international PNRs, the $3,471 average was well below last year’s $4,043.

In a sampling of 13 U.S. business-oriented routes, ARC data showed the average July ticket price (including taxes and fees) dropped in every one. There were double-digit percentage reductions versus last year for Washington Dulles-Los Angeles International; LAX-New York (JFK, LaGuardia and Newark); LAX-San Francisco; Chicago O’Hare-LAX; O’Hare-New York; O’Hare-Boston; and Boston-Washington National. Twelve of the 13 routes also showed lower average prices in March, April, May and June.

According to the U.S. Bureau of Labor Statistics’ Consumer Price Index, airfares were down 4.7 percent in June and 4.6 percent in July. CPI also charted reductions in four of the five previous months.

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