Balance Of Power In The Air: Capacity, Schedule Changes Reshape Skyscape

Corporate travel managers are facing a multitude of local and global service problems amid a rapidly shifting balance of airline power. As major airline players change their network game plans, trim unprofitable routes and shift capacity in the face of war and increasing financial hardship, smaller carriers continue impressive expansion.

Chief among the challenges for buyers as a result of these shifts are meeting contractual commitments, finding available inventory in certain fare buckets, maintaining a stable roster of preferred suppliers and, of course, ensuring travelers can get where they need to go.

Just last week, several U.S. carriers reduced international capacity and warned of service cuts in the domestic market, which could force travel buyers to find alternatives and modify contracts.

A recent Travel Analytics study of the 15 largest U.S. carriers, based on OAG data, identified JetBlue Airways as the most rapidly growing carrier, increasing the number of weekly scheduled seats 183 percent from February 2001 to February 2003. Frontier Airlines was second at 54 percent, followed by American Trans Air, 49 percent, AirTran, 33 percent, and Southwest, 1 percent.

In sharp contrast, the major network carriers retrenched in the past two years, led by US Airways, which flew 34 percent fewer weekly seats. Continental and United each cut weekly seats by at least 20 percent, while reductions at Alaska, America West, Delta and Northwest ranged between 8 percent and 12 percent. AA's weekly seats were down 3 percent in the two-year time period.

Overall, carriers operating at the 100 largest U.S. airports decreased lift by 15 percent during the two-year period. Seats are removed as carriers limit flight frequencies or shift to smaller planes.

Furthermore, Air Transport Association members removed 298 aircraft from their fleets between mid-2001 and year-end 2002 and cut daily flights by more than 8 percent, according to a recent ATA report.

"In general, as airlines shrink schedules, it makes it more likely that corporate buyers may need to expand their base of preferred suppliers to get more of their spend covered under a discount," said Scott Gillespie, principal of Cleveland-area Travel Analytics. "Airlines won't shrink proportionally."

Gillespie added that "a glaring oversight in today's market" is the absence of a quality of service index or similar fair share calculations in airline corporate contracts, noting that only Delta and US Airways "to an extent" base deals on such metrics. A QSI is a calculation derived, in part, from schedule and helps to determine an airline's place in a given market's pecking order.

"Some airlines have contracts related to QSI that automatically adjust, but most don't structure contracts that way," confirmed Larry Restiano, director of the customer value program and consulting group for American Express supplier relations. "We are spending time with clients first to understand changes and think of alternatives to fill the gaps, but also to see what it means for marketshare commitments."

Beyond those commitments, which particularly could be problematic in smaller markets or any other where a company's preferred carrier has significantly curtailed service, fare inventories are another issue. For example, a corporate traveler still may be able to get onto a flight in a high-volume market operated by a preferred carrier—even after a reduction in frequency or a downsizing of aircraft—but not necessarily on a fare that meets corporate policy. Indeed, carriers currently apply corporate discounts on fewer fare types than in previous years, and fewer seats in the market mean smaller inventories in each fare bucket.

As travel managers deal with contractual challenges, they also must make sure their travelers' service needs are covered. Though there have been some recent examples of airlines entirely abandoning a market, only one major carrier hub has been eliminated during this most recent industry downturn: America West's Columbus, Ohio, operation. American and Delta quickly announced expanded service to fill the America West void.

Some experts have said other hubs can and should be cut from networks, but carrier executives, at least publicly, have suggested only a strategy of downsizing.

"Does US Airways really need two hubs in one state? Does American really need three hubs in the Midwest?" asked Michael Boult, COO of Eclipse Advisors, a Rosenbluth International technology unit. "Going forward, there will be rationalization. But it needs to be done carefully. The ecosystem is the hub and when you start chipping away, the whole thing could collapse."

Other noticeable changes at top hubs in the past two years, according to the Travel Analytics study, occurred in Denver—where United's share of lift declined 10 percent and Frontier's grew 7 percent—and Miami, where American increased lift share 5 percent as United and US Airways each decreased their number of weekly seats. JetBlue grew its share of lift at New York JFK by 10 percent, while US Airways in Baltimore/Washington dropped from 29 percent to 6 percent. At smaller airports, JetBlue entered Long Beach, Calif., and by February operated a dominating 68 percent of the seat lift as American and America West dropped significant share. In Norfolk, Va., Southwest entered the market and by last month had a 23 percent share of lift.

More change is expected as persistently soft demand prompts carriers to continue cutting capacity and focusing on routes where they can achieve and maintain profitability. American, for example, plans to cut international flying by 6 percent and significantly reduce Amerian Eagle operations at New York JFK. United confirmed plans to cut capacity another 10 percent to 12 percent, and Continental suggested that it may cut service in smaller domestic markets.

"We are continuing to evaluate capacity reductions and if they have been impacting schedules and productivity. We have not yet seen it impact our objectives to meet our customer and business requirements," said Tom Barrett, global strategic sourcing director at American Standard Cos. in Piscataway, N.J. "If this pattern continues, we may have to see how it affects us in meeting our contract commitments."

Overseas services likely will be hardest hit if the war in Iraq persists. Though international travel is a much smaller component for most U.S. companies, service changes to overseas networks can be more problematic. Certain carriers would jump eagerly into specific markets given the opportunity, but international travel generally has fewer competitors serving most routes and fewer willing and able carriers in waiting, at least in the short term.

Last week, several carriers decreased or suspended flights to the Middle East and Continental cut frequencies on certain transoceanic routes.

At the most extreme, financially weaker carriers could be grounded altogether, likely resulting in immediate chaos for some corporate travelers and intense jockeying for position by surviving airlines.

Some corporate travel managers expressed relief regarding their preferred carriers' overlapping networks, which minimizes exposure to service disruptions. Others in hub markets, however, face serious disruption should the dominant carrier cease service.

"How would you get to Pittsburgh or to Charlotte? You just don't until someone fills the void or you have to connect everywhere and get coverage out of Newark and Baltimore," said Bill Patient, travel buyer at Atofina Chemicals, based in US Airways' Philadelphia hub. "I am more concerned about United. I have solid contingency and contract alternatives in place should I lose that one."

The Iraq situation—which ATA predicted would result in 2,200 fewer daily flights by U.S. carriers—and development of mega domestic alliances are complicating matters further. United and US Airways already have begun cooperating on routes and Continental-Delta-Northwest propose to do the same. That could alter marketshare in particular markets, prompt one partner to pull service on a given route and confuse corporate contracting.