<B> Buyers Rule The Pond</B>
<I>Delta, US Airways Adds To Offset BA, KLM-NW Capacity Cuts</I>
By Amon Cohen
Moves by key carriers to start cutting transatlantic capacity next month probably will not curtail the market conditions that buyers have been enjoying on those routes this year, as other airlines plan to expand such service.
So far, the signs of a buyer's market for transatlantic air travel have been clear: Supply has been way up, demand has been at best only slightly up and airline yields have been way down. Delta Air Lines estimated that average achieved fares in economy are 30 percent lower than in 1998. Premium fares have not slumped quite so dramatically, but "the business class market has been much more aggressive," said Delta U.K. sales manager Paul Maine. "There have been far more off-tariff programs out there and a lot of marketing initiatives, such as upgrades, free tickets and bonus miles. At the moment, corporate travel managers have a lot of cards in their hands."
British Airways is hoping to change all that with a new strategy designed to reverse its abysmal financial performance of recent months (see story). The U.K. carrier accompanied its latest quarterly results with the announcement that it will reduce capacity by up to 12 percent over the next three years. This will be achieved by axing routes and shifting half of its long haul fleet to Boeing 777s by 2002. The 777 carries significantly fewer passengers than the 747, the previous mainstay of BA's long-haul fleet.
The first two routes to be chopped by BA are London to Jakarta and Pittsburgh, which will be withdrawn on Oct. 31. Curiously, these are described by the airline as "over-serviced," even though no other carrier flies between London and Pittsburgh. US Airways has been applying to fly this service for some time and has redoubled its efforts for extra-bilateral authority since BA announced its withdrawal. Meanwhile, buyers in the Pittsburgh area said BA's exodus will inconvenience their travelers, who now must connect to get to London.
Whether BA's strategy will be sufficient to tighten overall supply and boost yields is hotly disputed. Those who think the plan will succeed include Michael Boyd, president of Colorado-based aviation research firm Boyd Group. "Now that the American Airlines-BA deal is pretty much dead, BA is fulfilling the original purpose of that deal, which was to reduce capacity across the North Atlantic," he said. "BA is saying that it is going to cut out the demand that does not want to pay a good price. I would think prices will rise."
BA isn't the only carrier eliminating transatlantic routes. Northwest Airlines and KLM Royal Dutch Airlines, citing "the challenging economic environment across the Atlantic owing to large industry capacity additions," on Oct. 1 will suspend daily flights between Philadelphia and Amsterdam and between Minneapolis/St. Paul and Oslo.
Ian Hall, chairman of the U.K. & Ireland Institute of Travel Management, is worried. "Cutting capacity is always of concern. A reduction in the number of services available inevitably increases prices," he said. "There may be an oversupply from the airlines' point of view, but not from travel purchasers'. There are still certain times when capacity across the Atlantic is full."
Others disagreed with this analysis by pointing out that supply has increased hugely in recent years and is set to continue to grow. The London-Boston route, for example, 10 years ago was served by two 747s per day. By the start of 1999 that had risen to three 747s, one 777, one 767 and two Airbus A300s, with United Airlines adding a further daily 777 in April.
"BA aside, airlines are looking to expand and increase capacity across the Atlantic," said Delta's Maine. "I don't think there will be any significant decrease in overall capacity--there will probably be an increase and there will certainly be more business class seats." For example, Virgin Atlantic this fall will launch a new route when it begins nonstop service between Chicago O'Hare and London and Continental recently initiated flights between Newark and Tel Aviv, its 17th transatlantic route from the New York area.
Piling on capacity even when it cannot be offset by improved passenger demand is not necessarily as irrational as it first looks. Maine pointed out that airline profits in the North Atlantic market remain among the best in the world, which is why carriers continue to withdraw aircraft from Asia and elsewhere to operate them between North America and Europe instead. Maine therefore is expecting even more favorable conditions for travel purchasers.
'There will be a further decline in yield but we are near the bottom. I expect the year-on-year fall to have ended by next spring," he said, although it may be some time before yield rises again. "The market will reach equilibrium and then price will play a less important role, which is why airlines will need a good product to compete."
Delta is among the U.S. carriers that have closed the gap in product offerings with European competitors in 1999. That and a more aggressive approach to sales and marketing has won many new customers at the expense of airlines such as BA. However, BA will raise the bar again next year when it introduces fully reclining seats in business class.
Another U.S. carrier with an improved business class and aggressive transatlantic expansion plans is US Airways. Its vice president of international, Mark Schwab, also believes overall supply will expand in spite of BA's cuts. "Around 70 percent of customers between Europe and the U.S. are going to the East Coast, which is where we have our major network," Schwab said. "Our plan is to grow over the next few years. We have seven Airbuses coming in 2000 and another seven to be reconfirmed for the following year. We have put on 20 percent additional capacity, but our load factors have improved. I admit there is pressure on yields, but on the other hand we were previously known mainly as a leisure carrier and we are now starting to draw a lot more business travel. Going into this autumn, there are going to be even more aggressive deals. I'm looking for new business."
Corporate travel consultant Andrew Solum of U.K.-based Travel Industry Associates supports the airline view that BA's strategy will not improve yield. "Airlines have got themselves into a bit of a hole," he said, "and no one is reducing in the premium cabins. American has shifted from A300s, which had 10 first class seats, to 777s, which have 18."
Along with stiffer competition from U.S. airlines, Solum noted the growing presence of third-party carriers. One example is Air New Zealand, which offers lower tariffs plus special deals, such as two tickets for the price of one, and has increased its London-Los Angeles schedule from three times weekly to daily.
Even BA is not cutting back completely. Even as it is dropping Pittsburgh, it has announced another three weekly departures between London and New York. It also continues to make generous tactical offers to soak up unused economy seats. The latest in the U.S. market, announced Aug. 23, was two free economy flights anywhere in the world in return for joining the airline's Executive Club, buying a full-fare Club World ticket and sending feedback on the service to the airline's Web site.