Airlines Cutting Schedules To Offset Jet Fuel Costs

LCT Staff
Posted on October 19, 2005

CHICAGO – Major U.S. airline capacity growth continued to moderate in September ahead of planned service reductions in the coming months and throughout 2006. With the price of jet fuel running at unsustainably high levels, some airline operators are concluding that a more cost-effective strategy simply is to ground certain aircraft rather than fly them.

For years, capacity cuts have been considered one of the more effective remedies for the floundering airline industry. Now that they are beginning to take hold, reductions are expected to help struggling carriers survive the leaner winter months by providing a degree of pricing power and stronger revenue performance.

For business travelers, service reductions can be both beneficial and problematic. On one hand, they help to mitigate air-traffic congestion and relieve operational delays. On the other, capacity cuts combined with still-strong travel demand translate to higher load factors and a less comfortable in-flight experience. Moreover, service cutbacks can mean less convenient schedules for many business travelers.

"There are draconian changes that have to occur," said one airline executive.

Delta Air Lines, for example, during a recent two-week period cancelled lightly booked flights as part of an "emergency fuel conservation effort." After jet fuel supplies stabilized in the southeastern United States, the carrier resumed its full schedule. Cancellations generally impacted early morning and late evening flights on routes with multiple daily frequencies. Before its reversal, Delta's decision caused concern throughout the corporate travel sector and exemplified the plight faced this winter by all airlines.

American Airlines recently suspended a total of 15 daily roundtrips on 14 routes from primary hubs in Chicago and Dallas/Fort Worth. It also plans to discontinue nonstop service between Chicago and Nagoya, Japan, following recent international service suspensions announced by Northwest Airlines. American is reducing service to such rival hubs as Atlanta, Denver, Houston, Minneapolis, Newark and Washington Dulles, among other cities, but in most cases will continue operating several daily roundtrips. The airline said it would again evaluate its schedule at the end of the month.

Meanwhile, bankrupt Northwest again reduced its late-fall schedule and said fourth-quarter domestic mainline capacity would be down as much as 10% from last year. International capacity will be down as much as 5%. System-wide mainline capacity in the first quarter of 2006 is expected to be cut by as much as 13% year-over-year. Northwest warned that mainline capacity gradually may be reduced by more than 15%.

Meanwhile, despite some airline assertions to the contrary, sources speculated that carriers may decide to further downsize secondary hubs. Delta, which previously deconstructed hub operations at DFW and recently announced significant reductions in Cincinnati as part of an overall move to eliminate 20% of its domestic capacity by 2007, could look to trim service through Salt Lake City. Northwest already has begun to cut regional flying. More of the same could endanger its Memphis hub.

J.P. Morgan Securities analyst Jamie Baker overall expects a 2% domestic capacity decline for next year, including a 6.6% reduction among the eight largest carriers and a shutdown of financially strapped Independence Air. "Put differently, mainline legacy operators are expected to remove more capacity next year than JetBlue will operate in total," Baker said. "Driving the charge toward less capacity are the recently bankrupt, though with jet kerosene topping $100 per barrel, we explicitly anticipate further declines in planned legacy capacity once the [third-quarter earnings] reporting season begins."

On the most basic level, fewer seats in the market generally translates to upward pressure on airfares. "Given the significant exit of domestic seats next year, we anticipate the torrid pace of fare increases to slow as carriers shift their focus toward traditional revenue management," Baker said.

That once again could lead to fewer seats available at lower fares, and a wider gap between the lowest and highest prices on any given flight. "We are seeing fare discrepancies cause a lot of concern among corporate travel managers trying to deal with the airlines," said Barry Rogers, senior consultant with TCG Consulting in Chicago.

Many corporate buyers have said that they expect and are willing to pay a little more than individual leisure travelers would for slightly superior airline service, including ticket flexibility and a wider array of flights from which to choose. As airlines cut routes and reduce frequencies, however, the convenience for their travelers is jeopardized, leaving some buyers wondering why they should pay more.

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