For Elite Travelers, Bad News Means Good Times

Nineteen months into the current recession, the airlines are stuck between a rock and a hard place. They’ve cut back flights to compensate for fallen demand, reducing their potential revenues in the process. But they’ve also had to cut ticket prices to keep those fewer jets flying full, further undermining their ability to operate profitably.

Under normal circumstances, the ratio of seat supply to consumer demand would be considered optimal. June load factors for the nine largest U.S. airlines averaged 84.7 percent, exceptionally high by historical standards. Yet, according to the Air Transport Association, an industry trade group representing U.S. airlines, ticket revenues plunged 26 percent in May, the latest month for which data were available, although capacity was down less than 10 percent.

While the falloff in travel overall, and the decrease in average ticket prices, are bad news for the airlines, those data points obscure an even more pernicious problem: the erosion of passengers willing and able to pay for first- and business-class seats. Reflecting an industry-wide trend, British Airways just reported that its premium traffic plummeted 14.9 percent in June, compared to just a 1.3 percent decrease in non-premium traffic.

Although such premium passengers occupy only a small percentage of an airline’s seats, the pricey tickets they buy can account for as much as 50 percent of a carrier’s revenue. So losing, gaining, or retaining a single high-yield customer has an outsized effect on an airline’s bottom line.

That, in essence, is the economic calculation behind the airlines’ current preoccupation with elite members of their frequent flyer programs. (Airlines typically award elite status to customers who fly 25,000 or more miles annually.)

Addressing a transportation conference in June, American Airlines’ chairman and CEO Gerard Arpey succinctly articulated what must be on the minds of many of his fellow airline chiefs: “We are focused on doing what it takes to win a disproportionate share of the industry