Analysis: US domestic market capacity cuts mount up

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Analysis from Antonio Panariello/Flight Insight

US carriers have collectively removed 8% of capacity from the domestic market for the fall season and may trim back even more as they come to grips with record high fuel prices.

Over the last two months most of the US majors have announced significant domestic capacity cuts for the last four months of 2008 and all of 2009 as they ground their least fuel efficient aircraft. While it will take several months for the cuts to be fully implemented, a majority will begin in early September following the end of the peak summer holiday season. According to schedules US carriers have now filed with Airline Business and Flight Insight partner Innovata, overall domestic US capacity will be down 7.9% in mid-September compared to the same period last year. Innovata figures also show a 7.9% year-over-year reduction for mid-October followed by an 8.4% reduction for mid-November. Schedules will recover somewhat in mid-December with a 5.5% year-over-year reduction as the peak winter season begins.

 

US domestic capacity for top 20 carriers – September 2008
Airline ASK Sep 2008 ASK change ASK Sep 2007
American Airlines 3,329,495,252 -8.4% 3,634,690,293
Southwest Airlines 3,207,762,799 0.6% 3,190,023,794
Delta Air Lines 2,743,996,639 -12.0% 3,118,448,215
United Airlines 2,591,900,069 -9.2% 2,853,830,183
US Airways 2,074,572,975 -5.0% 2,184,817,230
Continental Airlines 1,752,534,077 -10.3% 1,954,053,733
Northwest Airlines 1,463,063,392 -8.1% 1,591,998,080
JetBlue Airways 853,817,181 -7.2% 920,173,331
Alaska Airlines 743,198,159 -2.5% 762,399,900
AirTran Airways 650,322,664 -5.0% 684,349,322
Frontier Airlines 374,047,627 -2.4% 383,406,484
Hawaiian Airlines 257,334,809 -2.6% 264,215,591
Spirit Airlines 204,813,982 3.7% 197,427,267
Virgin America 169,720,160 165.1% 64,016,379
Midwest Airlines 154,491,974 -21.5% 196,924,504
Allegiant Air 81,595,672 -3.9% 84,876,803
Sun Country Airlines 57,324,170 -30.3% 82,245,274
Expressjet Airlines 34,176,029 -63.4% 93,475,367
USA 3000 Airlines 12,663,580 -63.1% 34,363,189
Great Lakes 12,104,985 14.0% 10,616,323

SOURCE: Innovata weekly schedules for mid-September 2007 and 2008. NOTES: Figures are for marketing carrier (mainline and regional operations included).

Of the big majors, American's capacity is going down by 8% in September, Delta by 12%, United by 9%, US Airways by 5%, Continental by 10% and Northwest by 8% (see chart above). All these figures are based on marketing carrier, meaning mainline and regional capacity is included.

Of the 20 largest US carriers, four small carriers have filed the largest schedule cuts for mid-September. ExpressJet, which has been steadily shrinking its independent flying unit, will reduce scheduled capacity by 63%. USA3000, which is mainly a charter carrier and tour operator, is also cutting back capacity on its small scheduled network by 63%. Two small niche carriers, Minneapolis-based Sun Country and Milwaukee-based Midwest, are slashing capacity in September by 30% and 22%, respectively.

Five US carriers have also shut down this year but they were all relatively small and only account for just over 1% of the overall capacity reduction in the US market.

The cuts will result in low-cost carriers picking up more market share. Southwest, which is slightly increasing capacity this fall, in particular will benefit. Innovata data shows in September Southwest will surpass American for the first time as the largest domestic carrier in terms of number of flights operated. Southwest will operate 22,915 flights per week in mid-September, compared to 22,542 for American including American Eagle and American Connection.

Southwest already carries more passengers than American and is also approaching American in the ASK race. In November, American will operate 3.237 billion ASKs per week in the domestic market while Southwest will be at 3.206 billion. This is the closest the two carriers have ever come in terms of ASKs.

In November, low-cost carriers combined will have a 27.5% share of the US domestic market as measured by ASKs. In May of this year they only had a 26.1% share and in August last year they had a 24.9% share.

Observers say this is by no means the final picture for 2008. One network planner at a US carrier says airlines are now playing a "stare down game" in which if one pulls a frequency on a particular route another will match it. He says more cuts than those which have already been announced are needed for the low season, which typically starts in mid-September and runs until mid-November. He adds carriers need load factors of at least 80% to survive in the current environment of high oil prices and to achieve this in the low season they may have to cut capacity collectively by 20% or more.

Craig Jenks of New York-based consulting firm Airline/Airports Projects says carriers are probably waiting to see if fuel prices increase further or if the economy weakens before deciding if more capacity cuts for this fall are necessary. "It depends on fuel. What has been happening is they are all cutting in sequence. It will stop if prices don't go higher. At current fuel prices the pivotal factor is the economy."

Jenks and other observers say night flights and other off peak flying in particular is being cut because the record oil prices mean high aircraft utilisation is no longer the best strategy. Observers say transcontinental flights are also being cut more than short-haul flights because flights of over three hours are more impacted by the higher fuel prices.

The cuts affect nearly every US airport. Of the 25 largest US airports, only two will see their capacity grow in September compared to last year. These are Seattle, which will see its weekly ASKs expand by 2% from 686.6 million to 699.8 million and Charlotte, which will see its weekly ASKs expand by 5% from 357.7 million to 374.4 million.

Mike Ehle, director of air operations at Seattle-Tacoma Airport, says it has been able to go against the trend by attracting new routes from low-cost carriers including AirTran, JetBlue and Virgin America. "Low-cost carriers have been building up their service at the airport and have been the driving force behind the increases."

Of the 50 largest airports, Oakland in California and San Juan in Puerto Rico have been hit hardest. In San Juan, cuts to American's Puerto Rico hub are driving a 27% decrease in capacity from 172.6 million to 126.2 million weekly ASKs. In Oakland, weekly ASKs are dropping in September by 34% from 260.1 million to 172 million.

Otherwise large airports are relatively evenly affected, with cuts ranging from 2% to 14%. Small airports have also been relatively evenly affected with cuts in the same range. For example, weekly ASKs at Manchester airport in New Hampshire will drop in September from 57.9 million to 49.6 million. "We've seen an 11% cut in capacity, but it's largely a reduction in seats as smaller aircraft are brought in," says assistant airport director, air service development and marketing, Tom Malafronte. "Delta cut out several regional jet flights to Atlanta, which were almost always full but didn't make money. Southwest though has done well and added a Fort Lauderdale non-stop in May that is doing very well. At the same, though, Southwest did cut its frequencies from 11 to 10 a day. Sometime in the autumn, the lines of dwindling supply and continuous demand will meet."

One notable exception is Toledo in Ohio, which is seeing its capacity drop by over 50% from 1.8 million to only 800,000 ASKs per week. On the positive front, New Orleans' capacity is growing 11.4% to 103.7 million ASKs and Indianapolis by 8.2% to 104.8 million.

US carriers have actually been slowly reducing capacity since last September but the cuts over the last several months are nothing compared to what will take place later this year. US carriers began contemplating major cuts in May, when American revealed plans to cut domestic capacity in the fourth quarter by 11% to 12% and ground at least 75 aircraft. Continental and United followed in early June, with Continental announcing an 11% cut in fourth quarter capacity and grounding of 67 aircraft and United announcing a 14% cut and grounding of 100 aircraft. Delta, Northwest and US Airways have since announced plans to significantly step up domestic capacity cuts which were initially unveiled earlier in the year.

While the cuts have captured the headlines over the last month, it is only over the last week that carriers have finalised the details and filed their schedules with Innovata. The figures accompanying this story are expected to change slightly over the next several weeks as carriers continue to tweak their schedules. Alaska, Delta, Northwest and US Airways, in particular, are expected to file updated schedules over the next week which will likely result in slightly lower figures. While American, Continental and United have already filed schedules which reflect their announced fourth quarter capacity cuts observers say these could be expanded over the next couple of months depending on how the market responds to higher air fares which are now in place to help offset the rising fuel bill.

"It's murky," Jenks says. "No one really knows where demand elasticity will be. We're in new territory. This is an industry that has a record of producing its product at progressively lower costs. So it has trained its consumers to expect a reduction in fares. Sure there will be a drop in travel. The question is how much. If the drop is more than the [8%] capacity cut then the airlines will have to do more."

 

USA Domestic – ASK market share
Airline Aug-07 Nov-07 Feb-08 May-08 Aug-08 Nov-08
American 15.3% 16.0% 15.8% 16.1% 15.9% 15.3%
Delta Air Lines 14.2% 13.7% 13.3% 12.4% 12.7% 13.3%
Southwest 13.2% 13.8% 13.9% 14.6% 14.2% 15.2%
United Airlines 13.0% 12.4% 12.6% 12.4% 12.7% 11.9%
US Airways 9.8% 9.8% 10.1% 10.1% 9.7% 10.2%
Continental 9.2% 9.0% 8.7% 9.2% 9.7% 8.3%
Northwest 7.3% 7.2% 7.3% 7.4% 6.8% 7.4%
JetBlue Airways 4.2% 4.2% 4.3% 4.0% 4.4% 4.6%
Alaska Airlines 3.4% 3.1% 3.2% 3.4% 3.7% 3.5%
AirTran Airways 3.2% 3.1% 3.1% 3.5% 3.6% 3.2%
Frontier Airlines 1.7% 1.6% 1.7% 1.8% 1.7% 1.8%
Hawaiian Airlines 1.1% 1.1% 1.2% 1.2% 1.2% 1.2%
Spirit Airlines 0.9% 0.9% 1.0% 0.9% 1.0% 1.2%
Midwest Airlines 0.9% 0.9% 0.9% 0.8% 0.8% 0.8%
ATA Airlines 0.8% 0.6% 0.5% 0.0% 0.0% 0.0%
Allegiant Air 0.4% 0.6% 0.6% 0.5% 0.4% 0.4%
Expressjet 0.4% 0.4% 0.4% 0.3% 0.2% 0.2%
Sun Country 0.3% 0.4% 0.5% 0.2% 0.3% 0.3%
Aloha Airlines 0.3% 0.4% 0.4% 0.0% 0.0% 0.0%
Virgin America 0.1% 0.4% 0.4% 0.6% 0.7% 0.8%
Others 0.3% 0.4% 0.1% 0.6% 0.3% 0.4%
SOURCE: Innovata data, based on weekly schedules for the middle of each month indicated.

Additional reporting by David Field