Airlines move to make bad situation worse
United plans to take 70 jets out of service, cut domestic capacity 17 percent
Associated Press
updated 4:22 p.m. PT, Wed., June. 4, 2008
CHICAGO - First it was soaring ticket prices and vanishing bargain fares, then new baggage fees. Now air travelers are facing dwindling choices for when they can fly and where — even to such popular tourist destinations as Las Vegas and Orlando.
The squeeze, a byproduct of record oil prices that are pushing airlines toward financial disaster, accelerated Wednesday when United Airlines announced plans to take 70 more jets out of service and cut domestic capacity by 17 to 18 percent in 2008-09. Its discount unit Ted will be shut down and 1,100 additional jobs eliminated, with more to follow.
That came two weeks after a similar move by AMR Corp.'s American Airlines, the only U.S. carrier larger than United, which said it would slash domestic capacity 11 to 12 percent after the peak summer travel season. American already has begun eliminating flights, as have No. 3 Delta Air Lines Inc. and others.
That's bad news for travelers, especially those who fly out of smaller regional airports that are losing flights and service, and it's almost certain to get worse unless oil prices drop and take the pressure off airlines to keep shrinking. "For the next year or so, it's going to be gloom and doom" in terms of fares and flight options, said air travel expert Tom Parsons.
While United didn't specify routes or flights to be trimmed, the airlines already have begun targeting less profitable flights even if they are to leisure destinations with strong demand. Several carriers have cut back on service to Las Vegas, Honolulu and elsewhere; Delta's service to and from Orlando, Fla., is down 45 percent from a year ago.
While demand for tickets to those destinations remains solid, the airlines say they have to focus on higher-priced and more profitable routes in the face of sky-high fuel prices.
A look at recent cutbacks and prospects for more among the six largest U.S. airlines:
AMERICAN — The biggest U.S. airline announced last month it would cut domestic capacity 11 to 12 percent after the peak summer travel season, but already has begun trimming flights. American will end its short-lived service from New York to London's Stansted Airport and drop a daily nonstop flight from Chicago to Honolulu. The carrier also is pulling out of Oakland, Calif. It plans to retire 45 to 50 planes, most of them gas-guzzling MD-80s, and its American Eagle sister carrier will retire 30 to 35 jets.
DELTA — More domestic capacity cuts likely to be disclosed in the future on top of the 10 percent reduction announced in March, which was 5 percent more than previously planned. Delta also said in March that it plans to use some aircraft less and park 15-20 mainline aircraft and 20-25 regional jets. Still expanding international flying — plans to increase international capacity by more than 15 percent this year.
CONTINENTAL — Still expanding its international network but plans to cut U.S. capacity 5 percent this fall because of concern about record high fuel prices and a weakening economy. Plans to drop service at Chicago's Midway Airport.
NORTHWEST — Plans to reduce domestic flying beginning in September by 5 percent more than previously planned, and has said further domestic capacity reductions are likely. However, in April it said its overall capacity would still rise 2 percent to 3 percent, although it also said that might come down because of fuel prices. Northwest has also accelerated the retirement of its old DC-9 aircraft, planning to operate 61 by the end of the year, down from 94 that it owned at the end of 2007. Northwest is also parking five to 10 Boeing 757s and Airbus A320s and A319s this year.
SOUTHWEST — Unlike the rest of the big carriers, Southwest has been adding flights. Airline said Wednesday it had nothing to add to CEO Gary Kelly's comments last month that "I would love for Southwest to grow modestly next year and in 2010, but at this point we're not making any announcements."
US AIRWAYS — Plans to trim capacity 2 to 4 percent in the second half and also will replace older aircraft, letting leases run out on 28 planes, including four Boeing 757s and 24 Boeing 737s. Those aircraft will be replaced with 14 Embraer 190s and five Airbus 321 aircraft. Morningstar analyst Brian Nelson says US Airways must make more cuts because of its financial position, which he says is "among the least attractive" of the big U.S. carriers.
Airline consultant Robert Mann said the tourism and travel industries as a whole are subject to "serious collateral damage," with a likely drop in air travelers to hotels and resorts in places that have flourished with the proliferation of low air fares.
The outlook may be grimmest of all for airlines that don't cut back enough to survive oil prices trading above $122 a barrel even after a decline from $135. That's still well more than double the $50-a-barrel price that United pegged its business plan to after emerging from bankruptcy in 2006.
"Some airlines will likely go bankrupt and cease operating," Lehman Brothers analyst Joseph Campbell said in a note to investors Wednesday.
That might help the bottom lines of those that manage to keep flying, but it would only speed up a trend of narrowing U.S. flight options that has been under way for months.
The largest airports may see only a small decline in flight options, but smaller cities such as Lancaster, Pa., and Ithaca, N.Y., already have lost all service. Experts say others in the East, Midwest and beyond are likely to see individual carriers depart or also lose service completely.
"If you're in a small city you're going to have less opportunities, and the leisure markets are going to be priced out," said Parsons, chief executive of the discount travel site Bestfares.com.
U.S. Rep. Jerry Costello, chairman of the House aviation subcommittee, said he is concerned about small and rural areas losing service. He said he strongly supports the "essential air service" program, which provides federal subsidies to guarantee air routes in rural areas, but is taking a wait-and-see approach before considering further financial support for carriers.
"We are in uncharted waters here (with potential mergers and record-high fuel prices) and we need to see how everything shakes out," the Illinois Democrat said in a telephone interview. As air service to rural areas declines, he said, all options "will have to be on the table."
UAL Corp.'s United said it plans to cut an additional 900 to 1,100 salaried, contract and management employees by the end of the year, in addition to 500 previously announced job reductions. The combined reductions mean the airline is cutting nearly 3 percent of its 55,600 workers worldwide.
"With fuel at historically high levels, United and our competitors need to redefine ourselves in this marketplace," Glenn Tilton, United's chairman, president and CEO, said in a message to employees.
United said it plans to ground its entire fleet of 94 Boeing B737s as well as six of the company's 747s — its oldest and least fuel-efficient planes. It previously said it was going to mothball 30 of the jets. It is scrapping the coach-only Ted service and reconfiguring those planes to include first-class seats.
Besides the larger reduction in domestic capacity, it also is scaling back international capacity by 4 to 5 percent.
Regardless of the impact on travelers, industry analysts hail the ongoing cutbacks as necessary.
"You can't just cut 17 percent of your domestic capacity if you're not in trouble," said Brian Nelson of Morningstar. "United is definitely taking the lead here in terms of the magnitude of cuts needed. However, it's going to also require others to make those steps."
Grounding the planes quickly could be a challenge for United. That is because half of the 737s it wants to pull from service are operated under leases, not owned outright.
"I think what they'll do is wait until they get toward the end of the leases before they park them," said Mike Boyd, president of aviation consultancy The Boyd Group.
United declined to say which companies it leased the planes from, but the contracts are likely spread among a number of different companies.
John McMahon, chief executive of Genesis Lease Ltd., which leases three Airbus A320s to United, said lease contracts typically run five years or more. Lessors may be willing to renegotiate the terms of an existing deal if they can line up other customers, but contracts typically don't require them to, he said.
"It's not unlike if you're renting an apartment, and you have a contract ... and you want to get out of it," McMahon said. "It's not that straightforward."
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