Still Way below Cruising Altitude

Even after a good summer, U.S. carriers are struggling

Continental Airlines (CAL ) Inc. was flying high as summer ended. With people cramming in one last trip before Labor Day, its planes were fuller than in any previous August, pushing up its unit revenues as much as 5%. Coming on top of July's 4.8% rise, that was Continental's best two-month showing since early 2001 and enough to put the airline in the black for the third quarter.

The summer returns for Continental and other major carriers offer hope that the airline industry may at last be pulling out of its nearly three-year slide. Thanks to cutbacks in their own payrolls and operations, as well as the unforeseen surge in late-summer travel, the big carriers should do better than many were predicting only a month ago. Already, airline stocks are heading higher, with American Airlines (AMR ) parent AMR Corp. up 35% and UAL Corp., the parent of bankrupt United Airlines, doubling in the penny-stock market in the past month.

Still, with summer crowds fading, the big question is whether full-fare business travelers will ever come back. Don't bet on it. Low-fare carriers have been steadily snaring corporate customers from the big airlines. Industry analysts have recently boosted their earnings forecasts for discount king Southwest Airlines (LUV ) Co. as well as up-and-comers JetBlue Airways (JBLU ) Corp. and AirTran Airways.

The major carriers can't blame everything on low-fare competition, though. True, most businesses have lifted the restrictions that were imposed out of fear of terrorism, war, and SARS. But even with low-fare options and the economy picking up speed, many companies still aren't letting their employees fly as they try to bolster the bottom line. "I think there's a new standard of frugality. And it's not going to change as companies become more profitable," says Alex V. Wasilov, president of travel agency Rosenbluth International.

That certainly seems to be the case so far. General Motors (GM ) Corp. is holding its travel budget flat at 2002 levels by conducting more Webcasts and pushing people to drive on trips of less than four hours each way. Hewlett-Packard Co. still bars virtually all intra-company travel, while DaimlerChrysler (DCX ) Chrysler Group is sticking with a two-year-old policy allowing only essential travel. Then there's PerkinElmer (PKI ) Inc. The $1.5 billion health-sciences company has forgone big meetings and turned to Web travel sites to slash its annual travel budget to $30 million from $50 million in 2000, says travel director Thomas F. McCabe -- all without disrupting business.

All that penny-pinching means a lasting headache for the airlines. Since 2000's third quarter, the industry's most recent profitable period, the top 10 have lost almost $20 billion. Although the third quarter is historically the industry's strongest, the top carriers are expected to lose up to $800 million in the current quarter. In fact, industrywide profits won't pick up before 2004's second quarter. "We have to become profitable," says Douglas M. Steenland, president of Northwest Airlines (NWAC ) Corp. "But as to when, we're not prepared to say."

Even newly profitable Continental sees little upturn in business travel. The number of trips flown by its 50 biggest corporate customers has fallen since 2001. Lawrence W. Kellner, the airline's president, predicts business travel will not likely get back to its heights at the turn of the century. Yet without more business travelers, he adds, the Houston airline cannot be consistently profitable. "The level of revenue activity we're seeing isn't going to drive a recovery," Kellner says.

To be sure, some companies are urging employees to get airborne again. Advertising and marketing execs at Interpublic Group (IPG ) are flying 10% to 15% more than they were a year ago. Business trips are also picking up at AstraZeneca (AZN ) PLC's U.S. subsidiary, says travel director Clive Armitage. "We've got new products coming to the marketplace," he says. "People need to travel." Too bad for the airlines that more companies don't share the attitude.

By Michael Arndt in Chicago, with Wendy Zellner in Dallas

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