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U.S. Airlines To Slice International Capacity
By Jay Boehmer
MARCH 16, 2009 --
After purging domestic capacity in the past year, U.S.-based airlines are beginning to look to their international networks—once bastions of unbridled growth—for a new round of capacity cuts to cope with deteriorating global demand.
Delta Air Lines this month said it would begin reducing international capacity by 10 percent in September, focusing on transatlantic and transpacific markets.
While Delta's competitors have yet to rival the extent of those cuts, several airlines during this month's J.P. Morgan Aviation & Transportation Conference in New York noted plans to scale back some international capacity.
In a memo to employees this month, Delta CEO Richard Anderson and president Ed Bastian said they would pare flying to markets witnessing "revenue weakness." By the fourth quarter, Delta expects transatlantic capacity to be down as much as 13 percent and transpacific capacity to drop by up to 14 percent, compared with the same period in 2008.
To achieve those cuts, the carrier plans to exit "low-performing markets, down-gauge certain routes, adjust frequencies and move some markets to seasonal service." The memo did not detail the specific markets that will witness cuts. The carrier said capacity to Latin America should be up "slightly in the fourth quarter."
Bastian, during the J.P. Morgan conference, said Delta's cuts are aimed to "address international weakness." Bastian said the carrier's domestic business is "relatively right-sized," though he expects some "modest trimming of the domestic network" by cutting such capacity by around 5 percentage points from 2008 levels.
Delta in December said it would further reduce systemwide capacity by up to 8 percent in 2009, with domestic cuts of up to 10 percent and international cuts of up to 5 percent (BTNonline, Dec. 2, 2008).
"In just the few months since we last announced capacity reductions, revenues have weakened, particularly in international markets," Delta executives said in a memo. Delta said it would "reassess our staffing needs" and aim to achieve reductions through voluntary programs.
United Airlines CFO Kathryn Mikells during the J.P. Morgan conference said the carrier's international capacity will be down 5.5 percent this year, though cuts made in the past year are materializing in a nearly 15 percent reduction this quarter. She said the cuts position the carrier to cope with sagging demand, particularly in international premium class. "Other carriers, including foreign flag carriers, are taking actions," Mikells said.
American Airlines CFO Tom Horton said the carrier is reducing mainline international capacity 2.5 percent this year, on top of a 2.7 percent reduction in 2008. "If we need to take out more capacity, we'll do it and we can do it," Horton said. "We don't have constraints to keep us from doing that."
Continental president Jeff Smisek, in his J.P. Morgan conference presentation, showed some growth in capacity of up to 1 percent to Latin America and up to 8.5 percent on transpacific routes. However, the carrier's transatlantic capacity is expected to decline by up to 7 percent this year. Smisek said the carrier has been continually adjusting capacity to respond to demand and would continue to "trim capacity where we think it's relevant."
Though carriers have released little detail about which international markets will be impacted by their proposed capacity reductions, Advito vice president Bob Brindley said, "The hard part is those are expensive routes to originally set up, and so it's not necessarily easy to pull back. You may have to reenter that market when the demand picks up. There may be a pretty hefty fixed expense to get things going again. Because of that, the carriers are looking long and hard if they should pull out of a market if they'll be prohibited from going back in. Frequencies are always easier to pull back than dropping out of a market completely."
Carriers on both sides of the Atlantic this quarter already have noted the soured demand environment in their plans to reverse the 2008 capacity gains between the United States and Europe. However, the magnitude of the transatlantic cuts is likely not enough to mitigate the ongoing deterioration in demand, particularly the dwindling appetite for premium class travel, airline analysts said (BTNonline, Feb. 2).
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