BTN Research: U.S. Carriers Backing Off Of Contentiously Sought China Air Services

United Airlines and US Airways are planning to delay the start of service to China by one year, as Delta Air Lines is seeking to trim its schedule between Atlanta and Shanghai beginning in November.

When U.S. and Chinese regulators last year approved carriers to nearly double service between the countries by 107 weekly frequencies through 2009, the largest U.S. airlines vied for the few coveted slots—initiating advertising campaigns, lobbying efforts in Washington and encouraging corporate clients to endorse their applications.

Due to unprecedented fuel prices and forecasts of demand softness, the China slot allotments for a few airlines have gone from hot commodity to hot potato, as carriers now are trying to hold off on service.

US Airways in June became the second domestic airline after United to file for a one-year extension, asking to delay its daily Philadelphia-Beijing service launch to March 2010. Based on fuel costs at the time of its application for service, US Airways estimated $50 million annual fuel expense to operate the route. At today's fuel costs, it would cost about $90 million.

Additionally, US Airways said "there remains concern that the global economy may be slowing and that travel between the United States and foreign points, including Asia, could decrease over the coming months and into 2009."

United's application, filed in April, requested to shift its San Francisco-Guangzhou startup deadline by a year to June 30, 2009. The U.S. Department of Transportation this spring approved the application, but with the right to open the route authority to another carrier in the interim.

United's DOT filing also blamed high fuel costs and reduced demand forecasts. When the carrier applied for the route, fuel cost $63 per barrel, but since has surged beyond $130 per barrel, making annual fuel costs for the route exceed $70 million, United said. It also blamed "the subprime crisis in the U.S. and its impact on the domestic economy" as it reduced demand forecasts.

Delta Air Lines was the first domestic carrier to gain a route authority under the new bilateral deal between China and the United States. The carrier on March 30 made good on its plan to launch daily service between Atlanta and Shanghai, but in June petitioned DOT to adjust its schedule "to reflect fluctuations in demand as a result of the deterioration in market conditions and skyrocketing cost of fuel."

Delta plans to maintain the daily schedule this summer, but wants to reduce daily flights in November to five services a week and return to daily service in May 2009.

According to scheduled data pulled by OAG for BTN, carriers from both sides of the Pacific grew the total number of nonstop monthly seats between the United States and Mainland China by 11 percent between June 2007 and June 2008. In addition to Delta's new service, Hainan Airlines this year added 5,772 monthly seats between Seattle and Beijing, while India's Jet Airways added 10,608 monthly seats from San Francisco to Shanghai through service that continues to Mumbai. However, two Chinese carriers scaled back capacity in the past year. China Southern trimmed Guangzhou-Los Angeles capacity by 27 percent, while China Eastern trimmed Shanghai-Los Angeles by 17 percent and Shanghai-New York service by 8 percent.

"The reality is the cost for an airline to fly a plane that long a distance is so exorbitant that even if they increase prices, they're not even able to make a profit," said Mitch Cwanger, air practice leader for American Express Business Travel Global Advisory Services. "When you raise prices to cover these incredible fuel prices, you're going to price yourself out of the market. That's what the airlines are forecasting. That's the reason they've decided to push back."

Though American Airlines, Continental Airlines and Northwest Airlines still plan to launch China routes allotted for next spring, several U.S. carriers, including the six legacy carriers, are seeking a two-year blanket dormancy waiver that would allow U.S. carriers to back out of any international service obligations, but maintain rights to routes.