REPORT BY RICHARD PINKHAM IN WASHINGTON
The industry is navigating uncharted territory in responding to the post-11 September traffic declines. The only certainties are that demand is down and cuts need to be made
"There was no time for surgical removal of routes: we were looking at 30% loads, system-wide. Right away we were told we needed to cut 20%. Period. Because there wasn't time to go over the schedule with a fine-tooth comb, we looked at each route and, if it hadn't been covering cash, it was gone." This is how one planner at a US major recounts the first round of capacity cuts made in the wake of the 11 September terrorist attacks and the ensuing sharp fall in traffic.
In the aftermath of the attacks, each of the major US network carriers announced wholesale capacity cuts, with a consensus around 20% down year-on-year. That meant that by the end of September, the majors were showing cuts of 15-26% compared to where they had started the month. Leading the charge was United Airlines, whose November schedule reveals system capacity down 25%, and departures at 74% of their pre 11-September levels.
Industry watchers wondered what form the cuts would take, with debates revolving around international versus domestic and short versus long haul. There were also questions as to whether they would come chiefly from equipment downgrades, frequency reductions or station closure.
It seems that the carriers eventually reached their decisions through a -still evolving - process comprised of scientific analysis, a desperate need for immediate action and, to some extent, a motivation to make cuts previously desired but which in normal times would have been politically or contractually impossible.
In the days immediately following11 September, when passenger loads were at their nadir, the cuts were undertaken under crisis conditions: several carriers were fighting for their existence, and every route was potentially on the chopping block. As a planner at one major says: "There were no sacred cows."
In that environment, time for reasoned analysis was not available. However, after the flights with the lowest profitability were removed, more difficult decisions arose. Was it more important to continue removing the flights with the lowest margins - or should strategic criteria get priority?
Some airlines focused the brunt of their cuts on their overseas networks. Delta Air Lines, for instance, took a lot of capacity out of its international system. For example, at New York JFK - which Delta principally uses as an international gateway - the carrier will suspend service to 11 overseas destinations and cut its overall operations by 43%.
Other airlines made the second tranche of cuts looking through the lens of passenger re-accommodation. If non-stop flights could be taken out of the system with minimal passenger inconvenience, they were. For instance, Delta more than halved its Delta Express non-stop flights from the Northeast to Florida destinations in large part because the affected passengers could easily be flown through Atlanta. The same rationale drove international cancellations at US Airways, as passengers booked on flights to Frankfurt or Paris from the company's Charlotte gateway could be rerouted via either Philadelphia or Pittsburgh.
Frequency cuts
For the same reason, air markets that had numerous daily frequencies were prime targets for easy cuts. American reduced its level of JFK-London routes from six to four, and United's usual level of 33 daily flights from San Francisco to Los Angeles was cut to 21 just after the attack, and to 17 on 31 October. Over its entire system, United's daily departures were brought down from 2,400 to 1,900.
The availability of transport substitutes also played a role. One carrier with operations in the Northeast, where cities are closer together than the rest of the country, axed short-duration segments, as people were opting to travel by train or car in any case.
Although this did remove some of the flights with the lowest post-11 September passenger loads, industry experts question the soundness of exposing customers to alternative means of travel. This line of thinking places particular emphasis on what a less-than-pleasant experience air travel in the USA has become in recent years, a trend that will no doubt be exacerbated by increased security in the wake of the attacks.
More interesting from a strategic viewpoint were cuts that served as vehicles to achieve other company objectives. For instance, United was able to discontinue the whole of its "Shuttle by United" product, the labour cost-savings of which had ceased to exist after a recent new pilot contract. In the same vein, US Airways used the opportunity to eliminate its low-fare - if increasingly high-cost - arm, MetroJet.
In so doing, US Airways removed from its system capacity that can be easily flown over its Philadelphia and Charlotte hubs, while retiring a fleet type that was relatively fuel inefficient and which it had paid for years ago. In addition to the MetroJet Boeing 737-200s, US Airways announced that it would accelerate the retirement of its entire fleet of Fokker 100s and Boeing MD-80s.
Removing these three aircraft types from its fleet will leave the carrier with only four aircraft families and save it millions of dollars in annual crew training and maintenance costs. Other companies have followed suit, with United phasing out its 737-200s and 727s, American mothballing its Boeing MD-11s, MD-80s, DC-9s and 727s and Continental putting its MD-11s and MD-80s out to pasture all earlier than previously planned.
The seat offer was also reduced by downgrading capacity through equipment changes. United, for example, replaced its mainline jet service with regional equipment in six markets. Less common were outright station closures, although some did occur. For instance, United closed its doors at Little Rock, Arkansas, and several other cities.
These terminations and service downgrades are indicative of the other objective being served by the capacity cuts: to effect changes that normally would be politically or contractually difficult, if not impossible.
Airlines often rely on the goodwill of politicians. Without the support of senators and representatives, objectives such as acquiring scarce foreign route authorities or gates at constrained airports would be much more difficult. Nothing jeopardises this support as much as reducing air service to a friendly government official's constituents - either by downgrading a service pattern from mainline to regional, or by pulling out of a market altogether.
| Post - 11 September capacity cuts | ||
| Departures | Seat Capacity | |
| US Airways | -23% | -26% |
| United | -17% | -21% |
| American | -18% | -19% |
| Continental | -19% | -19% |
| Northwest | -19% | -18% |
| Delta | -10% | -15% |
| Note; Monthly change based on OAG schedule data 1 September against 1 October. | ||
As a consequence, service will generally be maintained at marginal stations, even if equipment and resources would be better allocated elsewhere. These, however, are extraordinary times, as exemplified by American president Don Carty's statement to employees that "right now it is survival, not profitability, that is our core challenge". Many believe this situation has given the carriers a ready excuse to cut services and make other politically unpopular decisions.
Labour angle
Similarly, the airlines' contracts with their pilots determines the percentage of flights that can be handled by commuter equipment and often dictate that a route served by mainline cannot be converted to a commuter market. But now, the carriers are able to invoke the force majeure clause in their pilot agreements to make long-desired changes. Also, several companies are contractually obliged to maintain a certain number of mainline jets or increase their capacity by a certain percent every year. Even at the best of times, these onerous growth requirements often mean the addition of unprofitable routes. By jettisoning seat capacity now, it is believed that the airlines will perhaps be able to measure future growth from today's lower base.
That these cuts are a step in the right direction is certain, but how successful they will be is a question that remains to be answered. Carriers have grappled in particular with some of the latter cuts, wondering if they were removing capacity from the right markets. Analysing data gathered after 11 September, planners were reduced to guessing what types of markets would rebound fastest. One manager at a major recalls being confounded as the speed of recovery of business and leisure traffic seemed to take no pattern whatsoever.
Furthermore, everyone involved, from Delta chairman Leo Mullin down, have said that there is no way of telling what shape the industry will now take in the medium or long term, especially with regard to consumer demand.
It is impossible then to gauge how effective the industry's responses will be. As one planner says, discussing the efficacy of his carrier's cuts: "You always want to match capacity to demand, but no-one can estimate what demand will be like in two to three weeks, never mind two to three months."
Source: Airline Business
