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Transatlantic storm

Buoyed by EU-US Open Skies, the North Atlantic market is in for another significant capacity increase this summer. Will this hike, combined with record high fuel prices and a weakening economy, hit profitability?

It never seems to end. European and US carriers keep on pouring capacity on to the North Atlantic market. This summer capacity between the USA and Europe is up another 5.6%, marking the fifth consecutive year of capacity gains of at least 5%.

Since 2003, capacity has now increased by almost 40%. Even more incredibly, yields have posted steady improvements despite the capacity hikes. But with the economy now weakening and fuel prices having quadrupled since 2003, market conditions could become stormy this summer.

"You can't expect to continue to add capacity and for the yields to go up," says US Airways senior vice-president of schedule planning and alliances Andrew Nocella. "Some day we'll have to manage it. The Atlantic has been cyclical in the past and it will be again."

Adds Northwest Airlines vice-president of international alliances Nat Pieper: "The last two to two-and-a-half years everyone has done well over the Atlantic. There's got to be some point that the market gets softer." Air France network planning manager for North America Max Vallejo warns: "Summer 2008 will really be a test."

Nat Pieper

"There's got to be some point that the market gets softer"

Nat Pieper
Vice-president alliances, Northwest

There are already signs of some weakening. US Airways saw its transatlantic unit revenues only increase by 2% over the last three months of 2007 despite a 15% capacity increase. American Airlines also had a rough end of 2007 and start to 2008. "The last couple of months have been challenging but that's more because of fuel than the revenue line," says ­senior ­vice-president international Craig Kreeger. He adds transatlantic revenues are still rising, although not as fast as fuel costs, and the impact of the credit crunch on bookings "thus far has not been dramatic".

In fact most transatlantic carriers, including American, remain optimistic about 2008 and are not concerned about potential overcapacity. "We're still ­bullish for the summer," says Pieper of Northwest. United's managing ­director of Europe, Africa and the Middle East, Marcel Fuchs, says: "­Demand is strong. We're looking forward to a strong summer."

Nocella says the poor performance in the fourth quarter was caused by US Airways not being aggressive enough with sales in the three European markets it added last year. He says this has been fixed and the summer looks more encouraging, adding: "Our advanced bookings are full speed ahead."

British Airways commercial director Robert Boyle expects "a tough market environment over the next 12 to 18 months" but says so far the carrier has not seen any drop in demand. "For us it's still surprisingly strong."

Lufthansa vice-president sales and services Europe Karsten Benz says the German carrier has noticed a drop in advanced leisure bookings in the USA but this is being offset by an increase in leisure bookings from Europeans eager to take advantage of the weak US dollar. "Definitely there is some demand ­developments in the US, [but] we don't see any decrease in business travel," Benz says.

Delta paints a similar picture, with strong business bookings and an increase in European economy class bookings offsetting a reduction in US point of origin economy bookings. "It's very attractive to come to the States now," says Delta vice-president network planning Bob Cortelyou. "From everything we're seeing we're not seeing a drop in demand. Our bookings are strong and it's very encouraging."

Cortelyou adds there has been "a lot of scepticism" about the capacity Delta has been adding in the North Atlantic at double digit clips since 2005, but so far the market has easily absorbed the new flights. For the third consecutive year Delta leads all carriers with the largest transatlantic expansion. Delta launched nine new routes to Europe in 2006, added another six last year and is launching eight more this year. Its transatlantic network, which also includes the Middle East, India and Africa, has grown from 36 transatlantic destinations last summer to 45 this summer.

Over the last few years Delta's transatlantic expansion has been driven by the shift of Boeing 767s from domestic to international operations. This year, however, the increase is being driven by 13 newly acquired Boeing 757s. The 757s are being used to add four new European destinations - Edinburgh, Malaga, Lyon and Paris Orly. Delta is also deploying 757s on several previous 767 routes, freeing up 767s to launch Atlanta-Heathrow, New York-Heathrow, Atlanta-Stockholm and Salt Lake City-Paris, as well as several new routes to Africa and the Middle East. "This is an incredible year for fleet flexibility for Delta," says Cortelyou. "It should be another great year for us."

Northwest follows Delta with the second largest expansion across the Atlantic this year. The carrier is launching five new routes this summer and its joint venture partner KLM is launching a sixth. The moves follows several years of little to no expansion for the 10-year old joint venture. Northwest since 2003 has steadily lost market share to Delta, Continental and US Airways as those carriers ­aggressively expanded across the Atlantic while Northwest-KLM stood relatively idle.

"No one really had any airplanes to put in," Pieper explains. "Because we have been losing market share to competitors we view the 2008 growth as positive. There's a lot of pent up demand there."

Northwest is launching service this summer to Heathrow from Minneapolis, Detroit and Seattle. It will also begin Paris-Minneapolis and Amsterdam-Portland. But it is KLM's new Amsterdam-Dallas service which is really raising eyebrows. "Some people say you're crazy starting that in American territory but we are really confident," Pieper says. "With the Amsterdam hub we can make it work and American doesn't do much to Europe from Dallas."

American now only operates to Frankfurt, Paris and London from Dallas. It has axed its Dallas-Zurich service and Kreeger says American is more focused on expanding its two main transatlantic hubs, Chicago O'Hare and New York JFK, which are better positioned geographically for domestic connections.

While American is dropping Dallas-Zurich as well as Boston-Manchester and Chicago-Shannon, this is more than offset by the launch of four new European routes: JFK to Barcelona, London Stansted and Milan and O'Hare to Moscow. It is also moving its Gatwick-Dallas and Gatwick-Raleigh/Durham services to Heathrow, giving American its ­biggest transatlantic changes in several years.

American becomes the second US carrier to serve Moscow after Delta. Moscow has consistently been one of Delta's most profitable transatlantic markets and this has captured the attention of American and Singapore Airlines, which is launching four weekly flights on a Singapore-Moscow-Houston routing. "Moscow represents an increasing business market and one with increasing business ties to the US," Kreeger says. "We came to the conclusion there was a lot of opportunity in Moscow."

American, Delta and SIA are taking advantage of the fact that Aeroflot is unable to expand its US network beyond New York, Los Angeles and Washington. Aeroflot commercial director Alexey Sidorov says the carrier wants to cash in on the booming US-Russian market, with a preference to launch services to SkyTeam hubs, but lacks long-haul aircraft. "As soon as we get more planes we will ­extend such activity," he says.

Overall, European carriers are not expanding nearly as fast as their US counterparts. Last summer European carriers grew their transatlantic networks by 8.3% but this summer they are expanding them by less than 4%. US carriers, in contrast, are expanding their transatlantic operations by 7.9% (see charts).

The largest transatlantic carrier, British Airways, is having an unusually active summer but its capacity overall is only increasing slightly. BA is adding four weekly flights to New York and three weekly flights to ­Orlando, Seattle and Washington. It is dropping Detroit while its new OpenSkies unit is launching Paris-New York. BA is also moving Dallas and Houston flights from Gatwick to Heathrow.

Boyle says all these changes are driven by EU-US Open Skies, which comes into effect at the end of March. Open Skies is ­allowing BA to serve the USA from continental Europe for the first time, starting with Paris this summer and Brussels later in 2008. Boyle says under the old UK-US bilateral BA was also unable to increase capacity in several of its existing US markets. "There were some restrictions on the rate at which airlines on each side could grow frequency," he says. "The UK side was sufficiently far ahead of the US side and was held back by the ability to increase."

Lufthansa is the second largest carrier across the Atlantic and in recent years has been more aggressive than BA in adding new gateways. Late last year Lufthansa began serving Orlando and this spring it is launching Seattle, its 18th US destination. "This indicates clearly we see potential in the North American market and see further opportunities there," Benz says.

Aer Lingus, meanwhile, has grown its US network from four to seven gateways since last summer. The Irish carrier began serving Washington, Orlando and San Francisco late last year. Aer Lingus chief executive Dermot Mannion points out the carrier announced it was adding Washington, Orlando and San Francisco just hours after the EU and USA forged their Open Skies agreement last March, making it the first carrier to respond to the deal.

Air France has joined BA and Aer Lingus in taking advantage of Open Skies by launching a Heathrow-Los Angeles service. A route with both sides outside your home market seems risky, especially as Heathrow-Los Angeles is already served by five carriers. But Vallejo says Air France's new joint venture with Delta mitigates the risk and points out Los Angeles-London is as big a market as New York-Paris.

Other European carriers, however, have decided not to seize on the opportunities made available by Open Skies. While BA is ­launching flights between New York and continental Europe, the UK's other two carriers have decided to do absolutely nothing. Virgin Atlantic is operating exactly the same schedule to the USA this summer as it did last summer. It initially announced plans to launch services to the USA from continental Europe but has since put them on ice. Virgin president Sir Richard Branson says if Virgin does launch transatlantic serves from continental Europe it would be as a three-class carrier and not for another two to three years. "Ideally we would like Virgin Atlantic to be flying from a number of European cities. At the moment we have got an aircraft shortage so we have better ­opportunities from London," Branson says.

Bmi, which for years was one of the biggest advocates of Open Skies, has also put plans to expand its US network on ice and is instead focusing on growing its network in the east. Bmi currently serves Chicago and Las Vegas from Manchester but its long stated desire to launch transatlantic services from Heathrow remains unfulfilled. "2009 will be the first possibility of us going into the market," says bmi deputy chief executive Tim Bye. "We are still planning to see what falls out of all this new entry stuff and we'll make a decision then We have always been a campaigner for liberalisation of markets and it's not unreasonable to continue [to take that approach] but that doesn't mean we should feel embarrassed for not jumping into the market straight away."

Lufthansa has also decided against launching transatlantic flights from Heathrow. New York-Heathrow, which currently is not served by any Star Alliance carrier, would be its most logical Open Skies route. But Lufthansa says investing in the New York-London market is too risky because there are already over 30 daily flights between the two cities. Benz says it is "pausing for thought" before launching any transatlantic services outside the German market, adding: "We've been very successful in our strategy to not rush or hurry."

US carriers have been much more aggressive at taking advantage of Open Skies, quickly acquiring slots at Heathrow which under the old bilateral could only be accessed by American and United. Delta, Northwest, US Airways and Continental are all launching services to Heathrow at the end of March while American and United are expanding their Heathrow operations.

United is not adding any European gateways this summer but Fuchs says it is still expanding its transatlantic capacity by 12% this year as it adds flights from Heathrow and Frankfurt. "It may not be flashy but in terms of growth we're doing a lot at United on the ­international side," Fuchs says.

He adds United has not followed other US carriers in adding new European gateways ­because secondary cities in Europe are ­"effectively covered" by its Star partners via Frankfurt, Munich and Vienna. United's transatlantic strategy is to stick to hubs on both sides of the Atlantic. Continental and US Airways, in contrast, have aggressively been launching service to smaller European gateways in recent years. But this summer neither is adding a single European spoke with the ­exception of Heathrow.

Continental senior vice-president corporate development Mark Erwin says the carrier does not have any more 757s, which it used to open over 20 European destinations between 1997 and 2006, to continue dramatic transatlantic expansion. He adds Continental is now more focused on expanding its Asian operation using Boeing 777s and later 787s. "For 2009 we're very focused on the start up of Shanghai services," Erwin says.

After two years of rapid growth US Airways is also taking a bit of a breather on the North Atlantic this year. Nocella says overall US Airways' transatlantic capacity will be flat this summer compared to last year. In fact it has had to reduce frequencies in three European markets to make room for the new Heathrow flight. "Overall it's a fairly quiet year across the Atlantic for US Airways," Nocella says.

In contrast, US Airways grew transatlantic capacity by double digits in 2006 and 2007, adding three destinations each year. Nocella says US Airways is still keen on the European market and plans to again expand transatlantic capacity in 2009 and 2010. He adds six more 757s will be reconfigured for transatlantic operations by summer 2009 and the first four of 17 new A330s will be delivered by summer 2010. "We're still pleased with the performance," Nocella says. "This year our options were limited but next year that will change and we'll do stuff on the continent."

US Airways is not the only carrier already planning expansion for summer 2009 despite concerns the market could become oversaturated this summer. Says American's Kreeger: "We'll look at European expansion next year on top of what we are doing this year." Cortelyou says Delta will be able to again expand its transatlantic operation in 2009 using four additional 757s, seven 767-400s which are moving over from domestic services and a batch of new 777-200LRs. Aer Lingus plans to launch new US routes in 2009 using three additional A330s. Lufthansa will also expand its US network in 2009 and has "various ideas" for new gateways in the east and central regions.

BA plans to add in 2009 its first new US gateway in a decade. Boyle says BA has been unable to expand its US network in recent years because its fleet has not been growing. But it will receive four new 777s before next summer. "Undoubtedly some of them will find their way to the Atlantic."

 US-london market opens up

Carriers are bracing themselves for a potentially brutal summer in the US-London market as several new transatlantic services at Heathrow are launched in conjunction with phase one of EU-US Open Skies.

According to Innovata data, there will be 832 weekly flights this summer season between London and US airports, an increase of 8.5% compared with last year. This includes a net increase of 16 weekly flights for a total of 256 frequencies in the key New York-London market.

"I think there's no doubt there will be too many seats this summer. The question is how the market will respond," says US Airways senior vice-president network planning Andrew Nocella.

Adds Northwest vice-president of international alliances Nat Pieper: "I think everyone will take a step back and see how this Heathrow thing evolves. Can Heathrow handle this from an infrastructure standpoint?"

But Pieper adds "demand for London is still strong" and forward bookings are encouraging. United Airlines managing director of Europe, Africa and the Middle East Marcel Fuchs also says that forward bookings in the London market remain strong despite the increase in capacity. He adds intense competition in London is nothing new: "London and the UK market have always been hugely competitive."

British Airways commercial director Robert Boyle agrees, saying: "We're no strangers to competition. It's been a long era of competition. We're strong, we're in a good position, we have a good product and we have [Heathrow's new] Terminal 5."

In total 122 weekly flights are being added this summer between Heathrow and US airports. This includes 45 additional weekly flights by Heathrow incumbents, including 24 for BA, 14 for American and seven for United. Four Heathrow newcomers account for another 77 new weekly flights, including 28 for Continental, 21 for Delta, 21 for Northwest and seven for US Airways.

But Fuchs and Boyle point out that many of the "new" Heathrow flights are not really new because they are being shifted from Gatwick. "It's not all new capacity. It's switching from other airports," Boyle says. In fact, there are 70 fewer US flights at Gatwick this summer, with American cutting 21, BA 21, Continental 14, Delta seven and Northwest seven.

Craig Jenks, president of Airline/Aircraft Projects, a consultancy which tracks transatlantic capacity trends, points out that 14 flights were removed from the summer schedule in February as carriers realised there could be too much capacity in the New York-London market. Delta said last year it was keeping both of its daily New York-Gatwick flights while launching two new flights between Heathrow and New York. But it has since quietly dropped from its schedule one of its two New York-Gatwick flights. American also recently postponed the launch of a second New York-Stansted flight from March until at least August.

The result is there is only a 6.7% increase in flights in the key New York-London market from 240 weekly departures in July 2007 to 256 in July 2008. Jenks says this is much more manageable than the original 11.1% increase from 240 to 270 weekly departures. "In the last few weeks there's been a net reduction of two daily flights in the New York-London market," Jenks says. "Despite the stampede to Heathrow, when all is said and done there will only be an increase of two daily flights in the key New York-London market, which relative to the total is not that much."

But there still is a net increase of 65 weekly flights in the overall US-London market, which threatens to drive down yields. "That's always a possibility," says American senior vice-president international Craig Kreeger. "From many, many years of a hyper competitive environment we know that is part of the deal."

Adds the chief operating officer of Heathrow incumbent Virgin Atlantic, Lyell Strambi: "We're saying with phase one of Open Skies, bring on the competition by all means - we're certainly ready. But let's just make it a fair fight."

 

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