Hub Carriers Struggle To Recover By Cutting Capacity

The major U.S. airlines this fall will begin reducing system capacity, generally between 8 percent and 13 percent, leaving some travelers scrambling to find workable itineraries and forcing corporate travel managers to keep employees informed and, in some cases, reassess preferred suppliers. These reductions, reflective both of dire financial positions and annual seasonal changes, are indicators of an industry struggling to recover.

Decreased capacity at the major network carriers spells opportunity for such low-fare operators as Southwest Airlines and JetBlue Airways, which are showing no signs of retrenching.

Moreover, there are divergent viewpoints as to whether reduced capacity will allow the majors to raise fares in an attempt to restore revenue. Traditional supply and demand economics suggests it would.

J.P. Morgan Securities analyst Jamie Baker questioned the strategy. "Legacy carriers are reducing supply at the precise time they are making travel more problematic for the majority of their passengers through new fees and restrictions on ticket usage," he said in a recent research note to investors. "We fail to understand how this improves the value of, or demand for, air travel."

Much of the capacity reductions represent seasonal adjustments, decreased frequencies in certain markets and smaller aircraft deployed on certain routes, notably where older planes are being pulled from service.

Restructuring US Airways thus far has announced the largest near-term reduction in available seats as a percentage of its total. Effective Nov. 2, it will cut more than 300 daily weekday departures from its system schedule, or roughly 8 percent, representing an overall seat capacity reduction of 13 percent. Pittsburgh will lose 81 daily departures; Charlotte, N.C., will lose 32; Tampa, Fla., 21; Boston, 16; Tallahassee, Fla., 12; Baltimore, 10; and Philadelphia, nine. However, the carrier will add 14 daily departures from New York LaGuardia, including seven new US Airways Express turboprop flights to Washington Dulles. Caribbean service also will be bumped up 25 percent. Only one destination of US Airways' pre-bankruptcy 204 has lost service entirely: Saginaw, Mich.

Northwest Airlines also will cut fall capacity 13 percent versus its summer schedule. A spokesperson said the reduction, primarily a seasonal adjustment, is in line with cuts in the fall of 2000 and plans laid out for the fall of last year, which, of course, were altered in the wake of the terrorist attacks.

Industry leaders American and United airlines are yanking 9 percent of all seats from their fall schedules. United specifically will suspend Boston-London Heathrow, a lucrative business route.

"These are a combination of fundamental structural changes and tactical moves to reposition and resize the airline in light of a continued sluggish economy and changes in consumer flying behaviors," said AMR Corp. CEO Don Carty. American has not detailed its schedule changes.

Delta, the nation's third-largest carrier, is chopping 8 percent from its fall schedule. A spokesperson said the cut "includes seasonal adjustments and frequency reductions on routes where Delta is predicting decreased demand."

For example, the carrier on Dec. 1 will suspend daily nonstop flights between Atlanta and both Buenos Aires and Rio de Janeiro. "We have concluded it is better to focus our resources on those markets where we can be most competitive and realize the greatest revenue generation opportunities," said Subodh Karnik, Delta senior vice president of network and revenue management. "We do not see market conditions becoming favorable in either market in the next 12 months." Nonstop service to Sao Paulo is unaffected.

Continental Airlines' seat reduction strategy calls for a 17 percent decline in domestic capacity by August 2003, versus August 2001. The carrier already pulled 6.5 percent of its capacity in 2002, versus last year.

Alaska Airlines and Southwest, the only two major carriers to post sustained capacity growth this year, are not expected to announce any rollbacks in the near term and may, in fact, continue to add seats on performing routes.

Southwest's ability to avoid capacity cuts is indicative of the low-cost sector. Frontier Airlines is moving forward with a fleet renewal and plans to maintain annual growth of 15 percent. AirTran Airways' year-to-date traffic is up nearly 15 percent, with enplaned passenger numbers up 8 percent. The carrier in December is adding West Palm Beach to the network, its 40th destination. JetBlue, growing like a weed and flourishing in new markets, is taking delivery of new aircraft every five weeks.

Nevertheless, on an industrywide basis, there will be many fewer seats in the air this fall, especially on carriers with which travelers are more familiar. WorldTravel BTI, in its latest Insight newsletter, said, "Fewer flights will increase the possibility of more overnight stays due to the loss of the last flight availability." It also predicted decreased, if not eliminated, service to smaller communities, longer connection times and a higher likelihood of sold-out flights.

Some travel managers are more proactive than others in keeping travelers informed of airline schedule changes. "If the changes are dramatic, we'll send out a broadcast e-mail to the areas affected. If there are localized changes, we'll send out an e-mail specific to those cities," said a travel manager at an Atlanta-area company. "In general, I don't do all that much in detailing the cuts: With all the changes, I'd be doing something every day."

Another travel manager said his company has been employing various communication channels to keep travelers informed. "We use the internal intranet system, for example," he said. "Also, our agency goes through and pulls the airline reports and then deals with changes one on one with the travelers."