Road Warriors Fly Smart

They're traveling on the cheap--and that's hurting the airlines

Over the winter, Douglas Lancet was one of the few employees at Thomson Corp.'s West Group who kept flying. He boarded a plane almost once a week, while many of his New York-based colleagues at the legal-publishing firm, anxious over the September 11 terrorist attacks, switched to the train for business trips. Now, says the education and training manager, all of his co-workers are airborne again. "By necessity, you have to travel," he says.

Slowly but steadily, the business traveler is returning to the skies as terrorism anxieties fade and the economy rebounds. Last fall, corporate travel plunged 35% from a year earlier; by February it had crept back up to being just 20% off year-earlier levels, according to the Business Travel Coalition Inc. Indeed, anticipating a comeback, United Airlines Inc. (UAL ) and other major carriers have restored hundreds of flights and recalled thousands of the employees they laid off last year to stanch their losses. And American Airlines (AMR ) has even gone so far as to try and boost business class fares.

The bet that business travel will come roaring back is a risky one. The recession has caused more business travelers than ever to fly on the cheap. And it taught many more that they can get by with less travel entirely. With business fares still hovering around their pre-recession levels, corporate fliers are opting for discount carriers and cheaper advance fares, which fell 12% in 2001 to an average of just $106 one-way last December. That compares to $580 for a typical business fare. That saves tightfisted bosses money. But it also means airlines aren't filling as many seats with high-priced fares. That's a huge problem for the industry, since airlines have long relied heavily on those premiums for the bulk of their profits. That could mean "airlines can fly full planes and still lose money," says a Delta Air Lines Inc. (DAL ) insider.

To offset its ongoing losses, American tried in March to jack up business fares 10% by eliminating the three-day advance-purchase ticket. But the gambit backfired when Northwest Airlines Corp. (NWAC ) and others refused to go along. Southwest Airlines Co. (LUV ) then joined the fray on Mar. 19 by reviving a two-for-one deal.

The price wars demonstrate that there's still plenty of capacity flying empty--making United's move to add back flights all the more risky. While they are wagering that demand will grow strong enough to fill the aircraft, Lawrence W. Kellner, president of Continental Airlines Inc. (CAL ), frets that a prolonged fare war could delay a turnaround until 2003. Clearly, no end to losses is in sight. Delta warned on Mar. 19 that it expects first-quarter losses of more than $350 million.

As the economy rebounds, though, the airlines are betting that business travelers will take to the skies just as before, regardless of high business fares or travel alternatives such as video-conferencing. Says Kellner: "You don't build personal relationships over the phone."

But many corporate travel directors, and even some airline execs, say that the good old days may never return. Companies have a new attitude about flying. Employees at toolmaker Black & Decker Corp. (BDK ), for instance, have taken 11% fewer trips this year. "The inelastic rubber band of business travel, upon which the major carriers have depended

for so long, has been stretched too far and has finally snapped," says Peter Buchheit, the company's director of travel and meeting services.

Frugal corporate travelers have already proven a boon to discount carriers. Low-cost carrier AirTran Airways (AAI ) has gained 500 corporate accounts in the past six months, for a total of 3,500. Says John P. Tague, chief executive of discount airline American Trans Air Inc.: "I think the purchasing habits of corporations have changed forever." Of course, that's what some predicted after the last recession in 1991; after a few fat years, companies again bought premium tickets with barely a care. Even a few years of doing without, however, will seem like forever, given the way airlines are losing money these days.

By Michael Arndt in Chicago and Aixa M. Pascual in Atlanta, with Wendy Zellner in Dallas, and Julie Forster in Chicago

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