Transatlantic Battle Escalates

<B> Transatlantic Battle Escalates</B>

By David Jonas

Due to heightening competition and the reallocation of planes away from financially troubled Asian routes, carriers throughout 1999 have been adding capacity across the Atlantic. While the result from the airline perspective has been much rhetoric and an escalating buildup with no clear-cut winners, corporate buyers continue to see opportunities--though capacity reductions are probable for 2000.

"There is a war going on to own routes," said Rolfe Shellenberger, senior analyst at Runzheimer International, noting, for example, that no fewer than nine carriers compete for business between New York and London. "And from the standpoint of corporate deals, it's absolutely a buyer's market."

Simply put, "what the overcapacity has meant is great transatlantic pricing," said Kevin Iwamoto, global air and car supplier for Hewlett-Packard and Agilent Technologies in Palo Alto, Calif.

"We have done very well and are getting good results in our negotiations, especially with one of our preferred transatlantic carriers," said Ralph Davis, manager of travel services at Pittsburgh-based H.J. Heinz Co. "And it's because they are simply not filling their planes."

Of course, opportunities available depend on which market you are in, and business class is in higher demand than economy. But in general, there still are plenty of seats and a high level of competition to Europe on most routes.

In its report to investors on September quarterly results, Merrill Lynch said "overcapacity and fare sales have hurt every carrier's profitability in the Atlantic market," while pressures on that capacity "show no signs of abating" for the fourth quarter.

In fact, numerous airlines on both sides of the pond have stated that added capacity has hurt their bottom lines. AA chief Don Carty, for example, expressed concern about the high amounts of capacity in transatlantic markets (see story, page 1). However, Ray Neidl, airline analyst at ING Barings in New York, said, "While American complains the most, they are certainly in the foray." Indeed, AA's October transatlantic capacity, measured in available seat miles, was up nearly 9 percent from a year ago.

The situation is a catch-22. While increased capacity from competitors cuts into an airline's business, that airline must respond in kind or be left in the dust. As a result, Northwest's transatlantic ASMs were up 12.4 percent and United's up 12.6 percent. US Airways' overall international capacity, which mostly is to Europe, was up 18.9 percent for the month.

Meanwhile, many fingers--particularly from competitors--have pointed squarely at Continental for infusing unnecessary amounts of seats over the Atlantic. Included in its growth are recent launches to new markets including Amsterdam and Tel Aviv. "While it's an industrywide problem, Continental is one of the leaders," Neidl said. "However, their growth is justified because they are trying to build their Newark hub as a prime gateway to Europe."

However, despite the carrier's numerous pledges to maintain traffic growth as long as it achieves a 10 percent operating margin, there is some indication that Continental will be forced to slow its growth next year in order to meet that goal. In fact, the Merrill Lynch report concluded that it would be "difficult to construct a scenario wherein Continental could earn a 10 percent margin in 2000 unless capacity is cut."

Dave Hilfman, CO's vice president of national sales, said the transatlantic market continues to be a highly competitive area, but it has been a very good market for the carrier. Even so, moving into 2000, he said Continental is "evaluating demand and will adjust capacity accordingly," which could translate to aircraft downsizing on certain routes.

Another piece of the puzzle is airline alliances. One travel manager, citing the breakup of the Atlantic Excellence (<I>BTN</I>, Oct. 4), said, "The changing face of alliances, taken in conjunction with some overcapacity, spells opportunity for airlines and corporations to work more closely in strengthening or altering relationships." However, the buyer noted that a reshaping of global partnerships actually could eliminate some excess. "Airlines will adjust inventory and yield accordingly, and we could see it tighten a bit."

Iwamoto agreed. "I foresee a challenge coming as the alliance influence starts impacting our buying negotiations as capacity will probably shrink as they carve up the pie between themselves."

Looking forward into 2000, Merrill Lynch stated that overall "transatlantic capacity likely will be flattish, and could even decline," citing schedule reductions and aircraft downsizing. Indeed, several carriers--Lufthansa, Northwest and KLM--already have said they will downsize their aircraft. Likewise, British Airways said its move to smaller A318s will "modernize the carrier's fleet, increase average yields and reduce capacity" by 12 percent. In fact, BA already pulled out of Pittsburgh this summer, citing "over-service," while Northwest-KLM last month ceased service between Philadelphia and Amsterdam and between Minneapolis/St. Paul and Oslo (<I>BTN</I>, Sept. 6).

Meanwhile, Asia is on the road to recovery and carriers will start returning planes to revived business routes in that region. For example, Northwest expanded Detroit-Nagoya service and several carriers are planning new or expanded services to China. As a result, Iwamoto said he expects buyer-friendly pricing on the Atlantic to slide a bit "as the Asian crisis seems to be fading fast."

However, the overriding factor in capacity reductions likely will be the U.S. economy. A recession will force companies to watch their dollars and, in turn, cause airlines to remove excess seats. "People will still go, but at lower prices," Shellenberger said. "Then the yields will be less attractive and the airlines will cut capacity. The economics of the situation will rear its ugly head somewhere along the line."

There are a few European airlines bucking the trend and planning sizable transatlantic capacity increases next year, including Aer Lingus and Air France (<I>BTN</I>, Sept. 6). Virgin Atlantic, meanwhile, launched Chicago-London service earlier this year.