Capacity is due to fall steeply on the North Atlantic this summer, as carriers retreat from more marginal point-to-point markets in defence of their hubs
Just as it helped set the pace in the boom years, so too the North Atlantic market has led in the bust. A swathe of cancelled services show through in the summer schedules now taking shape, including some notable holes once filled by Sabena and Swissair. The tone is unmistakably defensive and there is a chance the market could emerge in better balance than during the aggressive offensive play of the previous few seasons.
Even before 11 September, it was clear that the market was heading for a fall. By mid-year, with business travel spiralling downward, traffic on the North Atlantic was on course for its first decline in nearly a decade. In the event, there was an outright collapse, with traffic down by more than a third in the immediate aftermath of the terrorist attacks on the USA. By the turn of the year, the curve appeared to be bottoming out with falls in the region of 15-20%. And as carriers post their March figures, the decline in traffic appears to have slowed again, heading towards single digits, albeit with yields also down steeply.
At the same time, carriers on both sides of the Atlantic have been swift to rein back on capacity. The initial cuts of 20-25% seem to have held up relatively well, combining with fare sales to help transatlantic load factors climb above 80% in March, a level usually reserved for the height of the summer.
Although schedules remain somewhat fluid, as carriers continue to look for opportunities to add back capacity where they can, those summer schedules filed so far with OAG suggest that capacity will be down in July by 14% or more on services between Europe and the USA. That would effectively wipe out four years of growth on the North Atlantic, taking volumes back to where they stood in the summer of 1998.
If demand does continue to flow back ahead of capacity, then summer on the Atlantic could be "quite reasonable for the industry," suggests Craig Jenks, president of the Airline/Aircraft Projects consultancy in New York, and a close observer of network strategies. He adds that there are still some big unknowns in the equation, not least the extent of the economic recovery and the degree to which traffic demand is being stimulated at the expense of yields.
Although it is dangerously early to predict a recovery, at present the numbers appear to be moving in the right direction. As a by-product of last year's crisis, the industry could perhaps even find itself in a position to address some issues with yield which had dogged it long before 11 September. Jenks points out that there are some basic economic parameters governing elasticity of demand which imply that fares should improve if aircraft remain full. Taking a realistic elasticity ratio in these markets of -1:1.5 would suggest in, at least in theory and all else being equal, that fares should rise 2% for every 3 percentage points that demand runs above capacity. However, this would initially only serve to bring yields back to where they were before the crisis.
Route deletions
Not surprisingly, the current environment has produced a retreat to the hub-to-hub concept, in contrast to the more aggressive addition of new points that had taken place over the past few seasons. The point is illustrated in this year's detailed analysis of the summer schedule changes between the USA and Europe compiled by the Jenks consultancy. Last year saw the launch of 27 new services, which produced a net gain of 14 daily frequencies after cancellations. In contrast the summer of 2002 is due to see a net loss of over 40 services, including the end of Sabena's network, only partially covered by the planned start up of VG Airlines at Brussels.
The bulk of the axed frequencies are inevitably taken from among hub-to-spoke services built up in the boom. Around half of those which were added only last year will now disappear, although as Jenks points out it is perhaps more significant as an indicator of planning volatility that half of the new additions actually managed to stick. Of the cities which gained their first transatlantic service last summer, only San Diego-London has survived. San Jose, California, lost its American Airlines link to Paris, and Lufthansa took Berlin off the transatlantic map with the end of its Washington service. London Stansted, an honourary "new city", also lost its Continental Airlines service to Newark.
There are also a handful of additions this year, but almost all are hub-to-hub, or rather to virtual hub where connections are made with an alliance partner. "Hub-to-hub flying is essentially defensive, so there tends to be more of it when you're protecting your market," says Jenks. The return of BA's Concorde to New York is one of the few hub-to-spoke additions, while the lone aggressive launch is perhaps Lufthansa's new Munich-Boston route. For Boston, that appears to pick up the lift lost when Swiss only maintained one of the two daily departures predecessor Swissair operated from Zurich, says Jenks.
He also highlights the extent of service cuts to California, where cities have lost nine daily transatlantic frequencies. In high-tech Northern California - hit badly by the dotcom crash - San Francisco loses the equivalent of four and San Jose a further five. Los Angeles also loses four. Jenks observes that it has always been harder for carriers to schedule routes economically between Europe and the West Coast simply because the distance does not allow for a rotation within 24h. He adds that geography also makes direct routes to the West Coast naturally vulnerable to substitution by services flying over the big central US hubs.
Despite the focus on point-to-point operations, it is interesting to note that BA actually plans to use one-stop services via Washington to maintain a presence at Houston and Charlotte. Direct flights to Houston have fallen from 10 to seven a week, but BA will add back connections to London Heathrow as an extension to Washington flights. In the same way, Charlotte will keep a link to London via Washington that was lost with the elimination of Gatwick non-stop.
BA is actually on course to trim capacity by a relatively modest 5.6% over the summer, thanks to the cutbacks it has already put in place over the past couple of seasons. By contrast Lufthansa and Air France face cuts of over 13% as they retreat from expansion, while the European carriers overall are due for an 18% decline in July according to the latest OAG schedule data.
There is still plenty that could yet upset the improving balance between supply and demand, not least a sudden rush to add back capacity as headline traffic numbers improve. However, as Jenks says, this could conceivably be an occasion when the "relative inflexibility" of adding or removing aircraft capacity actually works to the industry's advantage.
Source: Airline Business
