Airline Capacity Declining In Europe

Following their U.S. counterparts, European airlines are trimming operations in an effort to withstand worsening demand trends. According to a recent UBS Investment Research note, France, Germany, Italy, the Netherlands, Spain and the United Kingdom each are experiencing declining capacity on intra-European and intercontinental routes. British Airways and Alitalia have trimmed intercontinental capacity most noticeably for early 2009, UBS reported, and along with SAS have cut intra-European available seats by double-digit percentages versus one year earlier.

The region's long- and short-haul capacity reductions are occurring "for the first time since the Gulf War in 2003," according to UBS analysts, who expect full-year 2009 global demand to retreat 3 percent. "The first signs of capacity reduction in Europe are encouraging, but it is not on the same scale as that seen in the United States, yet."

The capacity reductions to, from and within the region include both European and non-European airlines. Overall, the largest cuts in available first-quarter seats are in Ireland, Italy, the Netherlands, Spain, United Kingdom, according to UBS research. "Given the relative performance of the local economies in each of these cases, this shouldn't come as too much of a surprise," UBS noted.

Among Europe's 13 largest carriers, UBS found that only two carriers had increased the number of available first-quarter seats within the region: Ryanair, up 2 percent year over year, and Swiss (up 4 percent). For long-haul operations, Iberia and Finnair are showing overall increases, with BA, Lufthansa, Air France-KLM and Alitalia each showing overall decreases. Carriers that made particularly sizable cuts include Alitalia, to Asia and the Middle East (down 38 percent and 32 percent, respectively); British Airways and Lufthansa to South America (down 10 percent and 8 percent, respectively); and BA to Asia (down 8 percent). See chart belowfor more details.

There are some localized cases of growing European capacity. Many airlines are upping operations in Italy, for example, following Alitalia's bumpy restructuring. Meanwhile, some European carriers are adding capacity to the Middle East; Iberia is growing operations on many intercontinental routes; and Finnair is increasing lift to North America by 30 percent.

Among non-European carriers, Cathay Pacific, Delta Air Lines, Emirates, Singapore Airlines and US Airways each are showing overall increases in capacity to Europe, according to UBS. But Air Canada, American Airlines, Continental Airlines, Thai Airways and particularly Northwest Airlines (down 14 percent) and United Airlines (down 13 percent) are showing overall declines.

United last week said total first-quarter capacity across all international routes would be down as much as 15 percent and as much as 6 percent for full-year 2009.

"As corporations are tightening their travel budgets, we are seeing a double-digit decline in international premium traffic, year over year," said United COO John Tague, speaking during a conference call last week with analysts and media. "We're rearranging the network a little bit, taking some frequency out of some of the big international markets and moving into places like Dubai that are performing extremely well."

At American Airlines, first-quarter international capacity now is expected to decline 4 percent. For full-year 2009, the reduction is estimated at 2.5 percent. During a conference call last week, Morgan Stanley analyst William Greene asked AA executives why cuts won't be deeper, suggesting "it's inevitable that we'll see a slowdown in international more than we are already seeing."

In response, AA CEO Gerard Arpey said the company is "prepared" to pare further "if it would be prudent."

Delta Air Lines said its first-quarter international capacity would be flat to up 2 percent year over year, but full-year 2009 international capacity could be down as much as 5 percent. Executive vice president Glen Hauenstein said Delta is trimming operations to London and Indiawhile routes to Africa, Asia and Latin America continue to perform reasonably well.

Air France, British Airways and Lufthansa will separately unveil their latest traffic and earnings metrics over the next six weeks.