Air Transport: Hard Times Now? Just wait until the Fall.

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Now that fall is upon us, the airlines are cutting back capacity.  While fuel is cheaper than expected, capacity is still being restricted.  I published this article back in June, 2008.  The impact shown here will now hit us in unexpected ways. 

One of which is pressure on airline upgrades for frequent flyers.   With fewer flights, there will be more platinum elite business customers competing for the available first class seats.  I saw that one personally last week on a flight to Newark.  Over 100 platinum customers on the same plane as me.  Despite my Y class ticket and status, I was number 24 for an upgrade!

Anybody who follows the airline business in the US reads daily about job cuts, capacity cuts and grounded aircraft. Anybody actually flying feels it in delayed flights, reduced amenities and increased fares. Face it, its not a fun time to be in the airline business. It has to be absolutely horrible for airline employees and their families.

Here's a snapshot of some of the major North American airlines and the impact that the weak dollar and higher fuel are having. Frankly it is a fiasco. Once the peak season this summer is over, the following cuts in people, planes and capacity have been announced.  No doubt more will be coming.  

The interesting thing is Southwest. Southwest will be growing their business by 4% as they take advantage of abandoned markets. Southwest has always been very aggressive on fuel hedging and is benefiting from that practice yet again. All carriers hedge fuel to some degree, but buying fuel on forward contracts takes cash.  With so many major carriers fighting just to make payroll every week, the liquidity isn't what it used to be. JetBlue and Airtran stand to also benefit though those carriers have made steps to delay delivery of new aircraft to help manage the stress.

Some of the ways the airlines are attempting to cope with the crisis are

• Increased fares! 
• Increases in peak season fares and surcharges. 
• Increased fees for baggage 
• Eliminating older aircraft 
• Increased use of Regional Jets 
• Postponed or canceled receipt of new aircraft orders 
• Eliminating unprofitable domestic routes 
• Eliminating less profitable international routes 
• Employee layoffs 
• Urgent work to convert to biofuels when possible 
• Fewer and fewer on board amenities 
• Increased service to higher margin international routes 
• Reduced number and hours of operation of Airline Clubs

Its not just the carriers here in the US that are struggling.  Qantas is having major problems in Australia and the Pacific as well. They've eliminated a number of routes between Asia and Australia as they refocus their aircraft on more profitable markets.

The Cargo Airlines aren't flying above the clouds either.

CargoItalia has returned it's aircraft to the leasing company. They may not return. Other carriers like Polar, Air Canada Cargo and Cargolux have reduced their capacity to Europe.  Singapore Airlines, EVA, Northwest Cargo and Air China have all cut capacity on the Asia to US tradelane.  Even on trades with high demand like the Latin American trades, carriers like Arrow and Centurion have been reduced to flying only on the weekends.

Air Freight Forwarders are receiving letters almost daily on new peak season surcharges and increases in fuel surcharges from the air carriers. These get passed along to the customer who in turn either has to adjust his sales price on his goods or seek alternative modes of transport. Any wonder why the ocean carriers are completely FULL?

For folks like me, there is opportunity and pain in this mix. The pain comes from my weekly air travel. I hate getting beat up every week just like the next guy.The benefit however is that shippers are more willing than ever to consider new supply chain ideas. Creativity and opportunities to shift the status quo are always fun. Lately that has taken the form of modal shifts to ocean freight and expedited LCL, strategic placement and allocation of inventory. Considerable focus takes place on green use of trucks/trains and planes as well as how to balance speed, shipment size and transit times across multiple supply chains within a conglomerate environment.

How are you managing both the stresses of fuel prices and the weak dollar in your business?

Eric

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Comments

[Paul Page]

The cuts in capacity are going on all over the world and even deeper in the cargo business in Asia:

http://www.trafficworld.com/newssection/airparcel.asp?id=48369

[Eric]

More details on Frontier from the Rocky Mountain News in Denver today. Not good

"Bankrupt Frontier Airlines will ground seven planes, reduce seats on its Airbus flights by 17 percent and slash hundreds of jobs in Denver as it scrambles to blunt rising fuel prices.

The moves almost certainly will lead to higher fares and consumers will have fewer flight options on many routes. Denver International Airport also might wind up with some empty gates and 800 or more local employees could find themselves out of work."

[Paul Gooch, The Logical Group]

All the actions you describe are consistent with an industry which is facing a near-death experience - however, if the result is that some older, inefficient, and less than well maintained planes are being removed from service, then we should be grateful

[GMan]

Now, add to all of this the up and coming TSA screening requirements in February 2009 and August 2010. Creativity and innovation is now a must, not just a luxury or a patch to wear. This is the time when leaders step out of the pack.

[Eric]

Thanks for this excellent info. I cant believe I left out US Airways. The rest of it is great detail as well.

Thats one of the reasons I love blogging. Readers can participate and add information to the dialog.

Eric

[ihate2fly]

Just some info:

Northwest - will remove 14 B757s and A319/320s (no further breakdown provided); DC-9s from 94 to 61.

Delta - the 4000 jobs cut were part of a voluntary retirement and "early out" program. Wanted 2000 but got twice the number.

Air Canada - parking 4 x B762s; the capacity cut works out to domestic capacity cut of 2%, US transborder by 13%, and international capacity by 7%.

AA - plans to add 70 B737NGs in 2009/2010 and wants to add more faster; will push MD-80s out; wants accelerated retirement of A300s.

Southwest - has reduced deliveries twice in the last 9 months; may keep 10 aircraft scheduled for retirement this year and will add 14 new aircraft next year resulting in a net increase in aircraft the next 2 years.

US Airways - 1700 jobs cut (300 pilots, 400 FAs, 800 airport/ground, 200 office/management staff); returning 6 x B733s and 4 x A320s, cancelling leases on 2 new A332s arriving 2Q09, plan additional aircraft cuts in 2009 and 2010. 4Q capacity cut 6-8%, annual cut 1-3%. LAS reduced from 141 to 81 flights.

WestJet - still plans 16% capacity increase this year.

Frontier - under Chapter 11 protection.

Spirit - announced worse-case scenario layoffs of 416 employees; tonight cut 20 CPTs, 25 FOs, undisclosed number of FAs