When Did Business Travel Demand Pick Up? And What Is the Real Purpose of Peak-Day Surcharges?

Airline nerds should check out the recent investor presentation given by US Airways’ Scott Kirby (as mentioned here, one of the smartest guys in the business).  You can download slides here and watch webcast here.  A couple of tidbits worth passing along:

On slide 16 you can pretty clearly see the turnaround in business travel beginning in mid-September.  Yes, it bottomed out in June or so.  But Kirby mentioned that leisure travel stayed pretty flat, while business travel absolutely collapsed.  Starting in mid-September we see yields (roughly the average fare) picking up as business travelers return to the market.  I think this shows that 2010 will, at worst, be somewhat better than 2009, but even though we’re hearing positive stories recently from the airlines, we should remember that the big carriers are still going to lose money in 2010.

The other interesting tidbit is on Slide 18:  You’ll see that year-over-year yields actually are up in November, the good sign of a possible recovery.  Kirby gives three reasons for yield improvement (other than business travelers returning to the market):  Less aggressive fare sales; canceling so-called “junk fares” (these are extremely low fares in some markets outside of a fare sale that become the defacto fare on the route); and Surcharges.

The surcharges thing was interesting, because I hadn’t fully understood why airlines had implemented the peak-day surcharges.  His answer:  to combat some of the yield management tools they use.  In short, there used to be a significant difference in product between the lowest fares available on a route and the more expensive fares (ie, advance purchase rules, Saturday night stay, etc).  Many-to-all of those differences have disappeared, leaving most people to simply take the lowest fare available since there’s no reason to move up a couple of fare buckets.  He says that yield management tools (the software that determines how many seats are available for a given fare) enters a “negative feedback loop” where, since no one is buying higher fare buckets, the tools keep making more seats available on lower fare buckets, which drives down yields.  Surcharges allow the yield management tools to keep working, while driving up the yield (by charging $20 or whatever on top of the cheapest fare bucket).

Certainly worth a listen if you care about this kind of stuff…

(Thanks to reader IAH-PHX for the initial heads up)

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