'Fragile' airlines may lose travelers as flu spreads
Tuesday, May 05, 2009
U.S. airlines already struggling with falling demand and fares on overseas flights may see that slump deepen as the swine flu outbreak spreads. Confirmed U.S. cases rose to 64, a day after the government advised against nonessential Mexico travel and clouding the outlook for carriers such as Delta Air Lines Inc. and American Airlines. Transat A.T. Inc., Canada's largest tour operator, today suspended flights to Mexico until at least May 31.
"The airline industry is so fragile because of the thin margins on which they operate anyway, so the loss of a few passengers can really hurt," said Michael Roach, an aviation consultant based in San Francisco. "It's certainly something international travel doesn't need right now, when it was already down."
Standard & Poor's said global airlines might face a "SARS effect," recalling the plunge in business for Asian carriers including Hong Kong's Cathay Pacific Airways Ltd. after the epidemic of severe acute respiratory syndrome in 2003.
"Though swine flu has not yet caused health problems on a similar scale, we believe airlines are at risk of suffering reduced traffic because of government-imposed quarantines and travelers' fears," wrote Philip Baggaley, an S&P debt analyst in New York.
U.S. carriers aren't specifying how many passengers have altered travel to or from Mexico, the epicenter of the flu outbreak, except to say the total was "not significant," as US Airways Group Inc. put it.
"The safety and security of employees and passengers is our number one priority," Chief Executive Officer James May of the Air Transport Association trade group said today in a statement. "Travelers should and airline employees are taking the situation seriously, but no one should panic."
Among U.S. carriers, Continental Airlines Inc. has the largest share of its seating capacity on Central American routes, 7 percent, William Greene, a Morgan Stanley analyst in New York, wrote yesterday. That includes 500 flights a week to 29 cities in Mexico. Alaska Air Group Inc. has 6 percent, while Delta and US Airways are at about 3 percent.
Transat suspended flights from Canada to Mexico through June 1 and from France to Mexico through May 31. Planned flights from Mexico will continue to May 3, and others will be added to bring home customers and employees, Montreal-based Transat said in a statement.
The Bloomberg U.S. Airlines Index fell 3.3 percent at 4:15 p.m. New York time after dropping 11 percent yesterday, the most in two months. Delta, the biggest U.S. carrier, slid 67 cents, or 9.9 percent, to $6.08 in New York Stock Exchange composite trading, while American parent AMR Corp. added 5 cents to $4.75.
Of 364,000 flights to and from U.S. airports each week, only 4,000, or about 1.1 percent, involve Mexico, said David Castelveter, a spokesman for the Washington-based ATA.
"For the airlines, it's small in the scheme of things," said Michael Derchin, an analyst at FTN Midwest Research Securities BLP in New York. "Assuming this is a confined type of outbreak, I don't think it's that big an impact." A trade group for global airlines said the timing of the epidemic "could not be worse."
World airline traffic fell 11 percent in March, a steeper decline than February's 10 percent, to extend a contraction that began in September, the Geneva-based International Air Transport Association said today.
BAA Ltd., owner of London's Heathrow airport, may breach the terms of its loans if swine flu caused traffic to drop 15 percent instead of the 9 percent decline predicted before the outbreak, Credit Suisse said in a note. London-based BAA said the suggestion was "spectacularly hypothetical."
Some of the largest U.S. companies began responding to the widening Mexico flu outbreak with curbs on corporate travel, the business most prized by airlines because those passengers typically fly on short notice and pay higher fares.
3M Co., the St. Paul, Minnesota-based maker of Post-it Notes, is allowing Mexico travel only for critical situations, Jacqueline Berry, a spokeswoman, said in an e-mailed statement.
General Electric Co. did likewise, with Mexico trips now requiring extra approvals, said Susan Bishop, a spokeswoman for the Fairfield, Connecticut-based company. "It's far too early to panic," said Kim Derderian, a Paris-based spokeswoman for travel-management company Carlson Wagonlit Travel. "The situation is still evolving."
A "small number" of Carlson business clients banned travel to Mexico, and one also put southern California off limits because of its proximity to Mexico, Derderian said.
While U.S. carriers focused on steps such as allowing fliers to rebook Mexico travel without penalties, US Airways and UAL Corp.'s United Airlines also stepped up cleaning and disinfecting jets returning to the U.S. from Mexico. US Airways is "going above and beyond" its usual practice and gave crews rubber gloves and hand sanitizer for use while collecting onboard garbage, said Valerie Wunder, a spokeswoman for the Tempe, Arizona-based airline. Chicago-based United is taking similar steps, said a spokesman, Rahsaan Johnson.
The flu outbreak began mushrooming last week just after the largest U.S. airlines finished posting first-quarter results that included traffic declines averaging 10 percent each and combined losses of about $2 billion. Continental said its yield, or the average fare per mile, on trans-Atlantic flights is down about 25 percent from a year earlier.
"Investors and analysts together were starting to have some signs of optimism that maybe we were starting to see the bottoming and after that would come a bit of a pickup," said Jim Corridore, an S&P equity analyst in New York. "To have anything else happen like this would delay that recovery."