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The price problem

Submitted by Paul Maurer on Monday, 11/01/2010 - 07:39

Due in part to increased business traveler demand, commercial airlines posted strong profits in the quarter. Industry consolidation and disciplined capacity management (demand has risen 6.1% so far this year while airlines added just 1.5% more seats) also contributed to the these impressive results. Unfortunately, the inevitable downside for travelers will be higher fares and fewer routes. Compounded by ancillary fee boosts (expected to rise 67% in 2010), travel budgets are projected to increase while frugal travel buying and austere travel policies remain the norm.

Unfortunately, this bounce in business travel is having limited impact on the private jet aviation sector (where 80% of demand is typically attributed to business purposes). Most don’t expect a return to pre-recession levels until at least 2012 with opinions on the current situation generally mixed. One major operator CEO called the market horrible while the New York Times’ Joe Sharkey characterized NBAA chief Ed Bolen’s pronouncement of industry stability as follows: “Of course, the captain of the Titanic might accurately have said the same once the ship settled on the ocean floor.”

Nevertheless, business aviation providers are responding. NetJets plans a fleet purchase of more economical aircraft, JetSuite pursues aggressive charter pricing on popular routes, and Executive Airshares offers a hybrid charter/fractional plan. Manufacturers are not standing idly by either with Sikorsky investing in Eclipse and Piper revamping their entry-level jet for the corporate market.

Whether these actions can move the needle downward on price – which Allen Howell of Corporate Flight Management rightly argues is the industry’s biggest obstacle to improving demand – remains to be seen. I believe an offering that successfully does (lower the price) stands to capitalize on the estimated $16.7B in estimated annual passenger costs caused by commercial flight inefficiencies.

(Excerpted from the October, 2010, igojet e-newsletter. To receive future e-newsletters by email as well as the latest version with links to industry articles used for this entry, please click here.

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