Transatlantic carriers slash capacity

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The party is over. After five consecutive summers of big capacity gains on the North Atlantic, capacity between the USA and Europe is down about 8% this summer. But demand is down even more, prompting some carriers to plan further capacity cuts for later this year which will likely spill into 2010.Continental president Jeff Smisek sums up the mood: "The transatlantic is fairly ugly right now."

According to Craig Jenksof Airline/Aircraft Projects, a consultancy which tracks transatlantic capacity changes: "The bottom line is it's not looking particularly good in the near-term. But I think there are reasons to be more optimistic in the long-term as the North Atlantic is an extremely cyclical market. We'll get over this but the question is when - by the summer of 2010 or will it take longer?"

The last major fall occurred in 2002, when carriers slashed transatlantic capacity by about 15% in the aftermath of the 9/11 terrorist attacks. In response to the current downturn, just about every major US and European carrier has cut transatlantic capacity. Some smaller carriers, including bmi and Malev, have even pulled out of the market entirely. But Jenks says compared withthe 12-13% dip in transatlantic RPKs in recent months, compounded by substantial yield drops,the 8% capacity cut currently planned for July seems inadequate. "The question is, 'does it get a bit better this summer?'" he asks. "If it doesn't they will have to make more cuts in October."

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Some carriers are already planning additional cuts. For example, Delta Air Lines in March unveiled plans to slash international capacity by 10% from September. Delta, which has overtaken Lufthansa and British Airways to become the largest transatlantic carrier when including its new Northwest Airlines subsidiary, is now deciding which markets to trim. But it but does not plan to shrink the size of its overall transatlantic network, which has more than doubled in recent years to nearly 50 destinations.

Delta senior vice-president network planning Bob Cortelyou stresses it is "extremely important" to keep the network intact so the carrier is in a good position when there is a recovery. "Despite adjustments for the economic downturn, we continue to be the leader across the Atlantic and plan to continue to keep that position," Cortelyou says.

The other four US carriers that operate across the Atlantic - Continental, American, United Airlines and US Airways - also stress they intend to cut frequencies rather than destinations as they attempt to realign capacity to meet shrinking demand. "We continue to maintain the breadth of our network serving roughly the same number of cities as we did in 2008," says United chief operating officer John Tague.

Over the last year only one US carrier has entirely pulled out of a European city - Continental, which last September exited Cologne. Delta/Northwest has discontinued several transatlantic routes, including Atlanta-Shannon, Atlanta-Vienna, Detroit-Dusseldorf, Seattle-London and Cincinnati-Rome, but all these European cities are still served from other hubs in the US.

European carriers have been a bit more aggressive at entirely eliminating gateways, with Alitalia and Aer Lingus pulling out of Los Angeles and Austrian Airlines dropping Chicago. SAS will also leave Seattle at the end of July. In addition, bmi has dropped Chicago and Las Vegas and Malev has dropped New York as part of their termination of all transatlantic services.

But the four largest European carriers across the Atlantic - British Airways, Lufthansa, Air France and Virgin Atlantic - have strived to keep their entire US networks intact. While Lufthansa has reduced transatlantic capacity by 4% this summer through frequencies cuts and gauge changes, vice-president Americas Jens Bischof emphasises the carrier has "no plans for giving up destinations".

EXPANSION ON HOLD

Europe's major carriers, however, seem to have put a hold on any expansion of their transatlantic networks until after the downturn. The only European carriers adding US gateways this summer are niche leisure operators such as Spain's Air Europa. US majors are more aggressive and are refusing to let the economic downturn keep it from expanding their transatlantic networks.

Delta, for example, is adding Valencia, a city in Spain that previously had no transatlantic service. While it decided against going forward with another planned new route, New York JFK-Gothenburg, and has pushed back the launch of Raleigh/Durham-Paris until 2010, Delta is also going ahead and launching Pittsburgh-Paris, JFK-Prague and JFK-Zurich.

Cortelyou is confident all the new routes will be successful and points to Delta's track record of successful launches in recent years. Last year Delta launched seven new routes between the USA and Europe and not one has been terminated. "We are generally pleased with the response to last year's transatlantic launches, considering the worldwide economic downturn and its impact on airline travel," Cortelyou says.

US Airways is also adding two new European gateways this summer - Birmingham and Oslo - which will be served from its main transatlantic hub in Philadelphia. It is also resuming service between Charlotte and Paris after an eight-year hiatus. US Airways senior vice-president of schedule planning and alliances Andrew Nocella says Charlotte-Paris bookings are particularly strong and the carrier is "excited about what that means" for future growth from the Charlotte hub.

But overall Nocella acknowledges demand on European routes remains weak with Nocella singling out the UK market as the weakest. "London is not performing where we need it to perform," he says, adding flights to Gatwick are showing the most deterioration.

US Airways had a rough first quarter on the North Atlantic, with unit revenues falling 20% year-over-year. "We expect that both Latin [America] and the Atlantic will under-perform domestic by an even wider margin in the second quarter," predicts US Airways president Scott Kirby.

Nocella says the economic crisis has forced US Airways to freeze plans to transition some of its seasonal transatlantic routes to annual offerings and scale back frequencies. For example, Birmingham and Shannon will only be served five times per week, instead of seven as originally planned. Kirby adds the carrier, which so far has only cut international capacity by 2%, is prepared to make additional cuts in response to anaemic demand.

However, Kirby points out that even though international performance is weakening more rapidly than domestic, it is likely to turn a higher profit than the carrier's domestic operations. "It [international flying] starts from a higher and more profitable base," he says.

It is a similar story at Continental. Chief executive Larry Kellner says, despite a rapid decline in premium revenues, Continental's international operation remains profitable and therefore the carrier has no plans to eliminate gateways. "As we look at how we focus our capacity going forward, obviously we're going to make the right fine-turning adjustments on frequency and day of the week," he says.Continental has already trimmed international capacity and is planning a further 1% cut from September. That will give it an ASK decline of 7-8% in September.

It now projects a 25% year-over-year drop in transatlantic yields for the second quarter, driven by lower business class load factors and revenues. "This is a time when we're grateful for our relatively lower percentage of business and first seats versus coach seats, compared with our competitors," Smisek says. "Or, put another way, we're really grateful to be flying so many 757-200s to Europe."

Continental, which has used the 757 to launch over 20 European gateways over the last decade, has by far the largest narrowbody transatlantic operation. Over the last few years its US counterparts US Airways, Delta and Northwest have also turned to 757s to expand their transatlantic networks.

This summer American is following their lead and using 757s to replace 767s on select transatlantic routes, giving the carrier a new option for decreasing capacity in response to falling demand. American says the first of 18 upgraded 757s replaced a 767 in May on the New York JFK-Brussels route. A second 757 will be used from August to replace a 767 between JFK and Barcelona.

THINNER EUROPEAN MARKETS

American is now in the process of upgrading another 16 757s with winglets and new lie-flat business class seats. American senior vice-president planning Henry Joyner says the 757s will be used mainly out of the northeast US for thinner European markets.

"Our first 757 applications will be in replacing 767s in some markets, especially where there is more than one flight," says Joyner, adding: "The product that we put in the front cabin will be perfectly competitive with anyone else's. Its size and economics at that range make it pretty attractive."

The introduction of the 757s on transatlantic operations will help American further trim capacity across the Atlantic. Through the first four months of 2009, the carrier's transatlantic capacity was down 3%. This was driven by frequency cuts, as American has not yet pulled out of any European market entirely.

So far American has cut one of its five Chicago-London Heathrow frequencies and one of two Los Angeles-Heathrow frequencies. Ithas also decided to cut, in August,its third daily frequency on Boston-Heathrow, which it only began operating earlier this year.

American has not yet unveiled additional capacity cuts for later this year, saying it is "waiting on more visibility". Joyner explains: "It is hard to tell because a lot of leisure traffic is booking much closer to departure than before. March is typically a heavy period for us because of holidays [in the US] and we saw people booking closer to departure and one school of thought is maybe that is what we will see in the summer too."

He adds that one of the current challengesis "for the last year, when the dollar was relatively weak, it was very attractive for Europeans to come to the US". That is no longer the case and, in the face of a lack of consumer confidence, North Atlantic traffic "is very challenged this year".

But that isnot stopping American, which traditionally has focused its transatlantic operation at Chicago O'Hare and New York JFK, from expanding its offering at its Dallas/Ft Worth hub. American is adding a third daily flight from Dallas to Heathrow and a new flight to Madrid, where it can link up with oneworld partner Iberia. "Given the state of the traffic across the North Atlantic, we are very cautious. The connectivity with Iberia will be better and [because of Open Skies] we can codeshare [beyond Madrid] more effectively on the other side," Joyner says.

American is confident it will also get a boost from its proposed agreement with oneworld partners British Airways, Iberia, Finnair and Royal Jordanian. The US Department of Transportationis currently reviewing the carriers' antitrust immunity application. "While we can't make promises about the outcome of the process, we believe we have made a very strong case and we continue to expect that approval will occur in the second half of this year," says American chief financial officer Tom Horton.

United Airlines is also keeping its transatlantic network intact despite overall capacity cuts and a 13% first quarter drop in passenger unit revenues. In fact United has added two European destinations this year, Geneva and Moscow, both which are being served out of its main transatlantic hub at Washington Dulles. It also has resumed services to London Heathrow from Denver, which it launched last year, but cut in October. United says the new routes further strengthen its international route network and expand its transatlantic portfolio to 31 daily flights this summer.

United is also expanding its reach in Europe through a new partnership with Aer Lingus. United reached a deal with Aer Lingus in January to co-brand Aer Lingus-operated flights between Madrid and Washington Dulles,slated to commence in 2010.

United senior vice-president alliances and regulatory affairs Mike Whitaker says United is anxious to watch the performance of the new service, explaining Washington-Madrid would be a test for deeper ties between the two carriers. This unusual transatlantic co-operation builds on a codesharing agreement between United and Aer Lingus that took effect last November.

ALLIANCE CO-OPERATION

United's Tague stresses that its transatlantic network is already bolstered through co-operation with Star Alliance partners. In April United and fellow alliance members Air Canada and Lufthansa, as well as prospective Star member Continental Airlines were granted tentative DOT approval for a transatlantic joint venture.

While Lufthansa is reducing transatlantic capacity by 4% this summer, this is being achieved as it increases the density of some of its aircraft. The German carrier is temporarily re-adjusting the configuration of its Boeing 747-400 fleet, which is used to link Frankfurt with 10 US destinations, with an extra 22 economy seats.

On US routes, Lufthansa's Swiss subsidiary is also introducing Airbus A330-300s, which have 40 more economy class seats than the A330-200s they replace.With the A330-300s Swiss is also introducing newly-enhanced first and business class products just as premium demand falls off the cliff. "You have to have a wider or complete view," says new Swiss chief executive Harry Hohmeister. "It is important that we go with our philosophy and strategy. An investment like the A330-300 is an investment for 20 years. This differentiates us from other airlines."

Jenks says Swiss is not the only transatlantic carrier upgrading its premium product just as premium demand plummets. But Jenks adds the cabin upgrades for the most part are resulting in fewer overall seats, as lie-flat seats take up more space than the traditional seats they are replacing.

He adds transatlantic ASKs are also being driven down by cutting a disproportionate amount of flights to the US west coast, compared with shorter flights to the east coast. He explains transatlantic flights to the US west coast are easier targets because they "are more expensive to operate and you can carry that traffic via other US gateways". He adds Los Angeles, in particular, "is taking a huge cut", losing about 25% of its transatlantic flights.

Seattle has also taken a hit, with SAS dropping Copenhagen and Northwest dropping London. But Icelandair has moved quickly to fill the void left by SAS. In late July it will launch four weekly flights to Seattle from Reykjavik, with quick connections to Copenhagen and five other cities in Scandinavia.

Icelandair chief executive Birkir Holm Gudnason says the carrier was attracted to the route because Seattle-Scandinavia is already a well established market, with SAS having served it exclusively for over 40 years. He expects 70% of the passengers on Icelandair's new Seattle flight will be Americans from the west coast heading to Scandinavia, or Scandinavians going to the US west coast. "This is the first time in history we've gone into an established market," Gudnason says. "Basically we're taking over a developed market."

He adds Icelandair has been studying Seattle for a decade but always hesitated because it thought there was too much capacity in the market. "When SAS announced in February they would quickly cut the route we basically decided in two weeks, after analysing the route and talking to the airport, that we would go in," Gudnason says.

OPPORTUNITY KNOCKS

Icelandair had the flexibility to react so quickly because it can temporarily borrow a 757 from a sister carrier. Gudnason says Icelandair is now monitoring several other potential markets and is ready to pounce if there is an opportunity in the current downturn. "We're looking at 10 to 20 potential gateways in the US and Europe, but we won't go in to add capacity. We will only go in if someone else pulls out," he says. "We can easily go if there's an opportunity."

While most transatlantic carriers struggle and look to cut rather than add capacity, Gudnason says Icelandair had the "best first quarter in history" and summer bookings are encouraging. He says while fewer Icelanders have been traveling since the onset of Iceland's financial crisis, this is being more than offset by an uptick in passengers holidaying in Iceland to take advantage of the devalued local currency.

He also points out while premium demand is down about 10%, Icelandair relies more on leisure traffic compared with other transatlantic carriers, where premium demand is down 20-40%. "We're pretty happy with what we are seeing. We're seeing similar bookings as last summer," Gudnason says. "At least the first nine months of the year are looking good. In this industry, the fourth quarter is something no one can predict."

Icelandair is not the only transatlantic carrier which sees a silver lining in the current climate. Continental's Kellner says the downturn helped the carrier acquire an additional slot at London Heathrow to enable it to shift its summer-only Cleveland service from London Gatwick.

"We were able to find somebody who had a slot for the summer that they weren't going to use. Clearly, we were helped a little bit by the overall softness, and found it a little easier to find a short-term slot, but that's a short-tem deal, not a long-term deal," Kellner says.