United Airlines is reallocating resources around its global network to emphasize international routes, while substantially slimming domestic mainline operations. By next spring, the world's second-largest passenger carrier will reduce domestic mainline capacity by 12 percent while boosting international flying by 14 percent, for a net system shrinkage of 3 percent. The strategy focuses on higher-yielding routes and leverages the strength of a global network while backing off direct competition against low-cost carriers in certain domestic markets.
Other major carriers have taken similar measures, including American Airlines, which will pull service between New York JFK and both Long Beach, Calif., and Phoenix, two routes characterized by low-cost competition. Other airlines are targeting new international markets to maximize revenues, notably Continental, which recently announced four new transatlantic routes.
Though United did not detail its specific reduction plans, analysts and some of the airline's corporate clients generally welcomed the decision to trim domestic capacity, which could spur other carriers to scale back in certain markets and potentially move the industry toward stability.
"United's plan makes sense and they say they are not cutting from their hubs, which is a good thing," said Kevin Iwamoto, Hewlett-Packard global air and car supplier manager. "There still is enough capacity in the domestic market. Maybe other carriers will stop the irrationality and do the same thing."
United said it would continue operations at its five U.S. hubs—Chicago, Denver, Los Angeles, San Francisco and Washington Dulles—and transition more domestic services to United Express regional operations.
"With United scaling back some flights, maybe they will be able to start doing things to be profitable," added a corporate travel manager at one of the carrier's Los Angeles-area accounts. United, for example, cut seats between New York and both Los Angeles and San Francisco, favoring an all-premium service set to debut today
(BTN, Aug. 2).Others were concerned about service reductions and costs. "United has to do whatever they can to maximize profitability, but this will hurt corporate travelers because planes will be more full," said Yasuo Sonoda, travel manager at Macromedia in San Francisco, a United client, "and when you reduce capacity, you can increase airfares. That is also where we will be hurt."
Michael Steiner, executive vice president of Ovation Corporate Travel, suggested business travelers would favor low-cost carriers over United if it reduces frequencies, shifts to smaller regional jets, or both. "Right now, legacy carriers have the leg up. Lots of our clients want the ability to choose from several flight options or make changes, if necessary," he said, "but if there is a major shift at United and other legacy carriers follow suit, that would really level the playing field in terms of lift."
Based on specific company travel patterns, some travel buyers said travelers already feel the pinch of lighter flight schedules. "All airlines have cut back flights in certain cities," said Sam Barber, director of business travel for Dawn Food Products in Jackson, Mich. "When we travel on short notice, we find that the flight we want is sold out and you cannot go when you need to go. That has had as much an impact on us as anything else over the past 15 months."
Decisions such as American Airlines' to eliminate certain routes could force buyers to look elsewhere for their travel needs. Specifically, AA on Nov. 1 will end nonstop service between New York JFK and both Long Beach and Phoenix, opting to redeploy resources in support of expansion at its primary Dallas Fort Worth hub. The carrier, which had been battling JetBlue's six daily nonstop flights on the Long Beach route, exited the nonstop JFK-Phoenix market before JetBlue created a toehold. JetBlue this month launched once-daily service to Phoenix from JFK. Low-cost competitor America West offers six daily nonstop flights from its Phoenix hub to JFK.
In 2002, American canceled plans to launch nonstop service against JetBlue between JFK and Ontario, Calif. Last spring, American left the JFK-Oakland nonstop market, surrendering the route to JetBlue. American, however, remains a top competitor between JFK and Los Angeles with 11 daily nonstops, and offers connecting to service to several southern other California destinations, as well as Phoenix.
Even as certain airlines consider downsizing smaller hub operations—as Delta is in Dallas—Continental this month inked a pact pledging to continue hub activities in Cleveland, its smallest domestic hub, through 2015.
Continental, meanwhile, is one of several major U.S. carriers eyeing growth in more lucrative international markets, including secondary business centers. This month, it announced nonstop Newark-Belfast service set to begin in May as the first-ever direct service from the United States to Northern Ireland. The airline said 160 U.S.-owned firms operate in the region. On May 19, Continental plans to launch daily nonstop service between Newark and Bristol, England, the first scheduled nonstop flights connecting the United States and southwest England. Bristol serves as national headquarters for 160 companies.
Continental announced it will begin daily nonstop Newark-Hamburg flights on June 9, the first such service between North America and the German city. The carrier on July 1 will launch daily nonstop service between Newark and Berlin. Both planned routes are subject to government approval. The carrier said 130 U.S. companies support operations in and around Berlin.
Continental SkyTeam partner Delta Air Lines also plans to offer nonstop service to Berlin, linking the German capital with New York JFK, effective May 2.
Under United's international growth plan, overseas routes by next spring would represent more than 40 percent of the airline's capacity and fully half of mainline revenue. Several new routes already have been announced, including service to Beijing, Buenos Aires, Ho Chi Minh City, Nagoya, Osaka, Shanghai and Zurich, as well as several new destinations throughout Latin America and Canada and additional service to Sydney. It also has applied for authority to begin nonstop service from San Francisco to Guangzhou.
Overall, United by March will cut its mainline fleet to 455 aircraft, 68 fewer than last summer and 112 fewer than the 2002 fleet size.
"The dynamics of today's industry environment, with fuel prices at an all-time high, require significant changes to address industry overcapacity," said John Tague, United executive vice president of marketing, sales and revenue. "For the last 24 months we have continued to exercise discipline in adjusting capacity to meet market conditions."
United's move to cut capacity would be a reversal of its growth during the past year. According to Travel Analytics, the airline increased available seat miles in the domestic market 16 percent between September 2003 and September 2004, easily the largest increase of any major carrier. In this month's traffic report, United said North America capacity grew 9 percent in September and more than 6 percent, year-to-date. The rate of capacity growth slowed from mid-year, when the first-half increase in ASMs exceeded 13 percent, but year-to-date numbers still were among the highest for Big Six network carriers.