Hub and spoke airlines face long-term challenges, S&P warns

New York, May 22 - Traditional hub-and-spoke airlines face a long-term challenge from alternatives to business travel, security hassles at airports and the steady spread of low-fare airlines, according to Standard & Poor's analyst Philip Baggaley.

Sharp cuts in aircraft deliveries planned for the second half of 2002 and through 2003 should gradually restore "a more favorable balance of supply and demand for airline seats," Baggaley said.

But he doubted that prices will firm to the strong levels of the late 1990s given the growing use of corporate jets and video conferencing instead of business airline travel, delays from tighter security and the ongoing expansion of companies such as Southwest Airlines Co.

Immediately, Baggaley noted in a new report that airline performance has been disappointing, with the Air Transport Association - which represents all major U.S. operators except Southwest - reporting revenues per available seat mile in April down 9.9% from a year earlier. That drop ended an improving trend since September.

While much of the decline can be explained by the timing of Easter, Baggaley noted that airline performance was already weakening in early 2001 so the comparisons with 2000, a relatively healthy year for airlines, show an "ominous" trend, he said.

Baggaley attributed the weakness in revenue to pricing in the domestic market. Yield in April was 11.9% below a year earlier compared to a 2.1% decline for international flights.

Load factor, the percentage of seats filled was little changed.

"Although planes are fairly full, few passengers, business or leisure, are paying fares that cover airlines expenses," Baggaley wrote in his report.

Business travel in particular is weak, he said, with fliers increasingly using discounted fares. Corporations, facing squeezed profits, are buying more discounted tickets, even with restrictions and airline efforts to tighten restrictions or raise fares have so far mostly failed.

In the near term, Baggaley doubts pricing will improve since airlines still have parked aircraft that have not returned to service. Of the 20% reduction after Sept. 11, less than half is older aircraft likely to remain idle permanently, he said.

"Still, even at current prices, the airlines, with their substantial fixed costs, will narrow their losses if they can increase the number of planes flying and still fill the same percentage of seats," Baggaley said.

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