“Ideas are commodity. Execution of them is not. ”
Editor's Desk: August-September 2008
In the same week in June, several airlines announced they would be grounding airplanes, reducing capacity and eliminating jobs, mainly because of soaring fuel prices. Meanwhile, the Stanford Transportation Group, a San Francisco-based consulting firm, reported the results of its biennial analysis of premium passenger activity in the U.S. airline and business aviation markets. I was surprised by the numbers. So was the National Business Aviation Association.
According to STG, business jets and turboprops flew approximately 17 million passengers on one-way trips in 2007 ( see Table A). This compares with 42 million "premium" airline passengers, which STG defines as first class, business class and full-fare coach.
The problem for the airlines is that the number of their full-fare premium passengers has decreased from about 75 million in 1998 (about 20 percent of airline travelers that year) to about 40 million in each of the last three years (about 9 percent of passengers in 2007).
"It's tough for most of the carriers to make a decent profit when only nine percent of their passengers are flying on premium fares, 85 percent are on discount fares and six percent are using frequent-flier miles," Gerald Bernstein, STG's managing director, told me. Bernstein based his airline figures on the DOT's Databank 1A 10-percent sample of airline tickets.
Meanwhile, business aviation travelers have increased from about 11 million in 1998 to about 17 million 2007, according to the STG analysis.
NBAA president and CEO Ed Bolen did not take issue with STG's airline numbers. But he is concerned about the consulting firm's methodology in determining business aviation passenger numbers. "If you look at the FAA's numbers for hours flown by business and corporate aviation, instead of using fleet size as STG did, you'll see that flying hours have been essentially flat since 1995," Bolen told me ( see Table B).
"Also, Bernstein used old NBAA estimates for the number of passengers per business aviation flight and averaged them to get the figure he used [3.5]," Bolen continued. "When I became president of NBAA, we looked at our previous figures and decided we could not support them statistically, so we stopped using them and tried to come up with a valid number, but couldn't. So we stopped referring to a 'passengers per business aviation flight' number."
But more importantly, Bolen is concerned about an unstated implication in STG's press release about the analysis of a causal relationship between premium airline passengers and business aviation travel.
Mike Tretheway, a transportation economist in Washington, D.C., who advises NBAA, said, "STG's numbers don't make sense. You can't make the correlation between a decrease in airline premium passengers and an increase in business aviation, because it isn't there."
Jens Hennig, vice president of operations at the General Aviation Manufacturers Association, said he knows Bernstein well. "Gerry does great research and is very knowledgeable about the aviation industry. The problem of airline passengers moving from the front to the back has less to do with corporate aviation than with the airlines' actions and decisions made by company travel departments."
Bernstein stands by his numbers. "The methodology could be refined, but I'm convinced it is close," he told me. Along with the fleet numbers, we used the number of landings reported by the FAA to determine the number of one-way flights. The number of landings is the best measure of the number of flights. Hours are the least reliable measure. The fleet and departure numbers are not flat. Regarding the passengers-per-flight statistic, I was not aware that NBAA does not consider it valid. I'm willing to adjust it." He said STG has been watching the passenger numbers since 1998 and doing the internally funded analysis since before 9/11. It announced its findings publicly for the first time two years ago.
Notwithstanding their disagreement about the number of passengers using business aviation in the U.S., Bernstein and Bolen agreed that the airlines' problems have been created by the airlines themselves. "The airlines were growing at a rate of more than two percent a year, adding more passengers in two years than the total number of passengers business aviation flies in one year," Bernstein said. "The airlines did not lose 35 million [premium-fare] passengers to business aviation. They lost them to discounted fares."
Bolen said, "Airlines are losing revenue because they've eliminated first-class cabins on many routes and because of the increasing influence of loyalty programs, Internet booking and corporate discounts. It's not that their premium passengers aren't still flying in first and business class when they can, but that fewer of them are paying the full fares."
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