Many of the world's largest airlines are reacting to the ongoing challenges posed by severely higher fuel expenses and deteriorating economic conditions by cutting operations and/or passing more costs to customers. With the aviation industry in crisis mode, moves by American Airlines, British Airways, Continental Airlines, Qantas Airways, United Airlines, Virgin Atlantic and many others will impact many organizations' travel budgets and business travelers' schedules.
At a minimum, dramatic capacity reductions will impact airlines' share of seats on specific routes, potentially altering how some suppliers and corporate clients set contractual goals and measure performance, while leading to more crowded airplanes. In some situations, depending on an organization's business travel patterns, a carrier may no longer be a viable preferred supplier, either because it reduces services, cuts routes altogether or becomes insolvent.
Among the latest developments, United Airlines will ground 100 aircraft and reduce fourth-quarter capacity by 14 percent year-over-year. The planned aircraft retirements--mostly scheduled for this year--include "all" 94 Boeing 737s and six B747s. Capacity reductions by the end of 2009, as compared with 2007, would include cuts of up to 18 percent for mainline U.S. domestic operations and up to 5 percent in the international network.
Capacity cuts "principally" would come in the form of frequency reductions in "underperforming markets." By September, United will suspend all service between Los Angeles and Hong Kong. The carrier also postponed until June 2009 its planned launch of San Francisco-Guangzhou service.
"While the vast majority of our international markets are performing quite well, there are a few markets that simply can't be profitable at today's fuel prices," said COO John Tague in a message to employees. Additional schedule changes will be made public "in the near future."
United also is cutting up to 1,600 salaried and management employees, determining how many frontline employees to furlough and "eliminating its Ted product." Ted was first publicized in November 2003 as a one-class, lower-cost operation. Its fleet of 56 Airbus A320s will be reconfigured next year to include first class seating.
Wall Street analysts welcomed United's decisions. "Rationalizing the fleet by eliminating an aircraft type saves money, and getting rid of Ted will allow them to refocus on the premium customer," according to UBS analyst Kevin Crissey. "We view these moves as a reasonably aggressive response to a very challenging environment."
Last month, American Airlines announced a domestic U.S. capacity reductionthat by the fourth quarter would result in the carrier flying 11 percent or 12 percent fewer mainline seat miles and 10 percent to 11 percent fewer regional seat miles than a year earlier. That includes plans to retire 75 mainline and regional aircraft. AMR chairman and CEO Gerard Arpey said the capacity reductions would create "a more sustainable supply and demand balance in the market."
American last week detailed "the first round" of cuts, which include discontinued services on the Chicago-Buenos Aires and Boston-San Diego routes, effective 3 September. The airline on 2 July also will end service between New York JFK and London Stansted Airport, less than a year after launching flights on the route to compete against now defunct MaxJet and Eos Airlines. In September 2007, AA's then-vice president of global sales David Cush described the service as "a perfect solution" for premium customers.
"I have never seen people as worried about the future as they are today," said Will Ris, American Airlines senior vice president of government affairs, speaking in May during an Association of Corporate Travel Executives conference.
Meanwhile, Continental Airlines on Thursday said its fourth-quarter international capacity would be down 1.6 percent year-over-year, including 4 percent fewer departures. Domestic U.S. mainline capacity reductions in the fourth quarter will include 11 percent fewer available seat miles and 16 percent fewer departures. The airline's total mainline fleet by the end of 2009 will shrink by a net 31 aircraft to 344.
In a letter to employees, Continental leaders explained the rationale behind 3,000 job cuts: "The airline industry is in a crisis. While there have been several successful fare increases, those increases haven't been sufficient to cover the rising cost of fuel. As fares increase, fewer customers will fly. As fewer customers fly, we will need to reduce our capacity to match the reduced demand. As we reduce our capacity, we will need fewer employees to operate the airline."
Delta Air Lines' planned domestic capacity cut for the second half of the year is 10 percent while US Airways reportedly wants to delay the start of Philadelphia-Beijing flights.
Elsewhere, Qantas said it was removing 5 percent of its capacity by grounding aircraft. Affecting both domestic Australian and international services, the cuts in some cases "will involve pulling off routes entirely. In other cases, we will scale back frequencies and capacity."
Fares and fuel surcharges
On the revenue side, airlines around the world are raising prices by either increasing published fares or applying higher fuel surcharges. British Airways, for example, this week raised per-flight fuel surcharges between £3 (US$5.88) and £30 (US$58.76) based on flight distance, bringing total roundtrip charges to as much as £218 (US$427) for the longest trips. [The airline also noted that while long-haul premium traffic in May was "slightly ahead of last year," short-haul premium markets "remain weak."]
Lufthansa on 14 May raised by €5 (US$7.73) surcharges on long-haul routes to €82 (US$126.70) per flight. Surcharges for flights within Europe rose €4 to €21 (US$32.45) per flight.
Other airlines recently announcing higher fuel surcharges or across-the-board fare hikes included Aer Lingus, ANA, Japan Airlines, KLM Royal Dutch Airlines, Qantas and Swiss.
Virgin Atlantic also adjusted fuel surcharges, but used a novel approach: for all bookings in the United Kingdom, economy-class passengers pay lower fuel surcharges (£83.50, or US$163.55, on longer flights) than premium-class travelers (as much as £107.50, or US$210.56 on longer flights). The differentiation is a departure from the standard industry protocol of applying the same surcharge to all passenger tickets for a given flight. The airline said that premium passengers' seats take up more space and their baggage allowance is higher, "so our aircraft burn more fuel to carry them."
In the domestic U.S. market, airfares are up substantially over 2007 levels as carriers since December pushed through more than a dozen broad price hikes. Tom Parsons of BestFares.com noted that "travelers flying between two noncompetitive markets over 1,500 air miles [on routes not served by AirTran, Frontier, JetBlue, Southwest, Spirit or Virgin America] now pay $340 roundtrip more than they did on Dec. 20, 2007."
Meanwhile, SAS took a rather unprecedented step in publicly asking its suppliers to cut the price of goods and services by 10 percent. In a press release, the Scandinavian airline company said, "SAS hopes to strengthen its relations and extend its cooperation with the suppliers that choose to contribute to a price reduction."
All the measures taken by airlines around the world are meant to help them avoid bankruptcy and/or lessen financial losses. The International Air Transport Association this week forecast a global airline industry loss of $2.3 billion for 2008, changed substantially from its March forecast of a $4.5 billion profit. JPMorgan analyst Jamie Baker now estimates that 2008 U.S. industry losses will reach "an all-time record" of $7.2 billion. "We are introducing a 2009 industry operating loss estimate of $8.1 billion," he added. "At current fuel prices, legacy [airline] bankruptcies and/or merge-at-all-cost attempts are a question of when, not if." JPMorgan ascribed the highest risk of bankruptcy among major U.S. airlines to US Airways, followed in order by Northwest, United and American.