By Joe Brancatelli
February 3, 2010 -- What would you do if as many as a quarter of your best and most profitable customers disappeared and those that continued to buy your premium-priced product were suddenly demanding you charge them a fraction of your old rates?

And what would you do if your bargain-hunting customers, who were never particularly profitable in the best of times, were now only buying when you sold to them below wholesale?

Welcome to the airline business. A huge chunk of the world's international business-travel elite have stopped buying pricey seats in the first- and business-class cabins. The best and the brightest who still fly are commanding titanic price concessions to sit up front or are headed back into the uncomfortable, unfriendly, and often unprofitable confines of coach. And leisure travelers are making the most of their status as "discretionary" flyers: They're not reaching for their wallets until airlines post insanely low fares.

The contours of the collapse of the global airline business are difficult to digest. Last week, the U.S. Department of Transportation reported that average fares in the third quarter of 2009 declined by 14.4 percent compared with 2008, the largest year-over-year decline on record. Fares, the government said, are back to 2005 levels—and domestic prices that year were unusually low because of a long-since-abandoned "simple fares" experiment launched that January by Delta Air Lines. In 2009, passenger revenue at American Airlines declined by 9 percent. It was down 9.5 percent at Continental Airlines, 12 percent at United Airlines, 13 percent at the now-combined Delta-Northwest, and a staggering 17.5 percent at US Airways.

Internationally, the results are even more cataclysmic. The number of flyers traveling on first- or business-class tickets has fallen every month since August 2008, says IATA, the airline industry's global trade group. The decline has been in the double digits in most months and plummeted almost 24 percent last May. In November 2009, premium-class demand dropped by what seemed like a more modest 6.7 percent compared with November 2008. But traffic in November 2008 had fallen 11.5 percent compared with November 2007.

"In terms of demand, 2009 goes into the history books as the worst year the industry has ever seen," said Giovanni Bisignani, IATA's chief executive. "We have permanently lost 2.5 years of growth in passenger markets."

Demand has fallen so fast that airlines can't cut the supply of seats fast enough. A record number of serviceable commercial aircraft has been mothballed, and the ATA, another airline trade group, says that U.S. domestic capacity dropped 6.9 percent in 2009 compared with 2008. That is the largest capacity decline since 1942, the first full year of U.S. involvement in World War II.

But back to the question: What are the airlines doing now that the demand for and prices of their product have fallen through the metaphoric floor?

The answer, sadly, is not much. At least not yet.

"When things go wrong, we go back to the file cabinet and pull out the folder full of ideas that didn't work in the past and try them again," one unusually insightful airline executive told me a few months ago. "We'll try the same old stuff. Anything really creative will be extremely rare."

Old idea No. 1: Try to shrink your way to profit. Several airlines, including Qantas and United Airlines, are slashing the number of first- and business-class seats they fly. The most recent example: Virgin Atlantic. It is quietly reconfiguring the upper deck of its Boeing 747s, which it once marketed as a "snooze zone" for business-class passengers who weren't interested in sitting downstairs near its stand-up bar. Out go 10 business-class seats and in come 33 coach chairs. The problem with this idea? A coach seat to London from New York can sell for as little as $300 roundtrip and even at times of peak demand rarely commands as much as $2,000. Business-class seats rarely sell for less than $2,500 and can cost more than $12,000 roundtrip. There's virtually no profitable payoff when you fly more coach travelers.

Old idea No. 2: Discount your way to survival. Airlines long ago abandoned the taboo on discounting business-class seats. But the current price slashing in the premium classes is unprecedented. Buying as little as a week in advance can yield discounts of as much as 75 percent. And seasonal sales like those currently being offered by Continental Airlines are now standard. That's good for us business travelers, of course, but bad long-term strategy for the airlines. After all, if you buy a $1,600 business-class seat to Europe for a summer holiday, how can you avoid feeling ripped off when the same carrier demands five or six times as much when it's time for your September business trip?

But there are some signs of newish thinking too. Although most of the all-business-class airlines that launched in recent years collapsed due to record-high fuel prices, shaky management, and honest-to-goodness bad timing, one has survived. OpenSkies, the boutique carrier launched in mid-2008 by British Airways, had to downsize, merge with a French competitor, and weather a move by BA to sell it, but its dual-tier approach to business-class flying is still around. And later this month it will announce a new route, its first in more than a year. "I think there'll always be room for a better product at a lower price, and that's what we offer," says Dale Moss, a longtime BA hand and OpenSkies' ever-optimistic founder.

Two primarily domestic carriers that only sell coach travel, JetBlue Airways and Frontier Airlines, have introduced seats at the front of their aircraft that have as much as eight inches more legroom. For a modest premium of $10 to $50, depending on the length of a flight, travelers buying these extra-spacious coach chairs get some much-needed comfort. The idea is a riff on Economy Plus, a premium-priced extra-legroom section that United Airlines has offered in many of its coach cabins since 1999.

And, then, there's this: The SkyCouch from Air New Zealand. It's a genuinely new idea—albeit one based on the time-tested business-travel trick of scoring an empty row coach and turning it into the poor man's version of business-class accommodations. In essence, the SkyCouch is a row of three coach seats. The armrests move out of the way and the footrests raise up to seat level. That combination creates a sort of lie-flat daybed. Although exact measurements are still vague, a fully deployed SkyCouch seems to be about 30 inches wide and 5 feet long.

The problem with the SkyCouch, which Air New Zealand says will appear on some of its flights in the fall, is price. The airline says two passengers wishing to share a three-seat SkyCouch will have to pay the equivalent of two coach seats plus half the cost of the third. A lone traveler will have to bear the entire cost of a SkyCouch on his or her own.

Will two coach leisure flyers, conditioned to pay only the lowest fare available, spring for a few bucks more? Maybe. Will business travelers, who usually fly solo, spring for two and a half seats to make a jury-rigged bed? Will the bean counters who audit their expense accounts let them?

Tune in come December. Assuming, of course, that there'll still be an airline industry in December.

The Fine Print
Continental isn't the only airline selling business-class seats at a deep, deep discount for summer travel. You'll find similar fares from Lufthansa, SAS, and several other carriers.
ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring.

THE FINE PRINT This column is Copyright © 2010 American City Business Journals. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2010 by Joe Brancatelli. All rights reserved.