The decline on the North Atlantic appears to be bottoming out although uncertainty remains, not least in the dynamic balance between USand European carriers
As the summer season takes shape across the North Atlantic there appear to be some signs that the market trough has begun to bottom out. The headline figures for seat capacity slumped a little, due largely to cuts from the US majors, but the fall was less than 1%. That is in contrast to the tailspin a year ago when capacity dived by nearly 15%. Perhaps more persuasively, the schedules filed this year look decidedly less defensive than they did over the 2002 summer season.
The point is illustrated by the annual analysis of schedule changes between Europe and the USA carried out by Craig Jenks of the Airline/Aircraft Projects Inc (AAP Inc) consultancy. "Last year saw a huge flight to safety in hub-to-hub services as typically happens in a downturn. But that appears to have bottomed out," says Jenks.
Looking at the schedule changes for July, Jenks notes little activity on routes between hubs or mini-hubs, with relatively few additions or route deletions and netting out at a loss of 1.75 daily flights. By contrast, there were 15 new routes added to spokes or on point-to-point services. Allowing for a host of deletions too, mainly by the USmajors, that nets out at a modest gain equivalent to just under a single daily flight. Jenks stresses that his analysis is based on how the service is intended by the operating carrier rather than on the size or role of the airport as such. For example, while Atlanta and Frankfurt undoubtedly both operate as hubs, linking the two would not constitute an inter-hub service for, say Delta Air Lines, which only offers connections at one end of that route.
Europeans widen the gap
But the most striking feature this summer is the growing imbalance between European and US carriers. A look at the preliminary OAG data for July - and factoring in some late schedule changes - shows western European airlines raising capacity by 7% while their US counterparts shrank service by 5.5%. That leaves the Europeans accounting for just over 56% of scheduled seat capacity at the height of the summer, compared with less than 41% flown by US carriers. The remainder is largely taken up by carriers from Asia and the Middle East flying fifth freedom services.
The Europeans had already established a healthy lead, but the extent of the gap has widened markedly. "The US-Europe imbalance is striking, even allowing for the dynamics of a competitive market," say Jenks. According to the AAP Inc analysis, the summer schedule produces a net addition of 7.5 daily services for European carriers and the equivalent to a loss of eight daily flights for the US majors.
A mix of US industry restructuring and the uncertainties spilling from fighting in the Gulf are obvious candidates for the widening imbalance. However, Jenks identifies other factors too that may have helped swing the market in favour of the Europeans.
First, he highlights the rapid strengthening of the euro against the US dollar - the sort of currency issue that even in more normal times has the power to cause significant shifts in the flow of leisure passengers. By early this year, as the schedules were being finalised, the euro had already climbed steeply, rising by as much as 20-30% against a weakening dollar. "North Atlantic tourism is traditionally very sensitive in both directions to exchange rates," says Jenks, describing a likely two-way effect as European tourists take advantage of cheap dollar prices, predominantly flying on their home carriers, while US leisure travellers stay away from an increasingly expensive euro zone.
Jenks also points to fallout from the Civil Reserve Air Fleet (CRAF) programme, which saw US airliner capacity taken up by the military to fly services in support of the war in Iraq. Even though the Department of Defense was progressively releasing aircraft as the summer approached, the uncertainty over their availability appears to have had some impact on the schedules, at least for the early part of the season.
Delta Air Lines, for example, went into the summer short by three aircraft. The eventual release of capacity from the CRAF allowed it to return most of the second daily between its Atlanta hub and Frankfurt. A second Delta daily between New York JFK and Paris is also set to come back in August as CRAF unwinds. Neither is Delta alone in facing some hard choices from CRAF. Northwest Airlines too, for example, pulled off a daily Detroit-Rome service as it marshalled capacity.
Uncertain times
The degree of uncertainty that has lingered over the final shape of the summer timetables is illustrated by the number of new services that were publicly announced but which failed to materialise. Jenks points to the American Airlines plans for a daily from JFK to Barcelona, Delta's proposed daily between Boston and Rome, and to Northwest's aim to link Detroit and Madrid over the summer. From the European side, Virgin Atlantic also announced but later withdrew a couple of services between London and the US East Coast: a second daily from Heathrow to Washington Dulles and a weekday service from Gatwick to Boston.
The outbreak of SARS in the Asia-Pacific region added a further potential sensitivity over schedules, with some early fears that capacity might have been shifted on to the North Atlantic. In reality, the fears appear not to have been realised, with the possible exception of Air France's fifth daily between Paris and JFK, which took a Boeing 777 from Asia. However, even then, there were other reasons for Air France to make the switch, including the withdrawal of Concorde from the route. Such uncertainties are one reason why this analysis runs a couple of months later than in previous years.
Factors such as CRAF and the foreign exchange imbalance, Jenks argues, mark a "tactical rather than strategic" shift by the US carriers and could swing back next season. However, the wholesale restructuring taking place among the US majors is also playing its part in the shifts taking place on the transatlantic. Jenks points to the decisions by some to withdraw whole fleet types. Delta, for example, is in the process of taking out its Boeing MD-11s, while American is phasing out its transatlantic Boeing 767-200 fleet.
Northwest Airlines, too, is poised to start replacing its ageing fleet of 24 McDonnell Douglas DC-10-30s on the transatlantic. In their place, new Airbus A330-300s, will progressively take up routes out of the Detroit, Minneapolis and Memphis hubs as they begin to arrive this year. Besides giving a size and fuel-efficiency advantage, Northwest president Doug Steenland recently reported that the aircraft will come equipped with the airline's new upgraded business class product, helping balance the offering from long-standing alliance partner KLM. The future arrival of smaller A330-200s could also open the way to secondary European markets. Steenland indicates that their main role is to link US spokes to Northwest's hub in Tokyo Narita, but they could also provide the opportunity to serve European cities such as Madrid, Manchester and Milan.
US Airways has also exchanged A320 orders for additional A330s in future years, while next summer Lufthansa too will supplement its traditional four-engined operations with the A330. It is just one of a series of innovations coming out of the German major, notes Jenks. Lufthansa expands its experiment with transatlantic business jet flying this year, adding additional Airbus Corporate Jet services from Düsseldorf and Munich. The carrier has also started service into Portland, Oregon, backed by a $10 million guarantee from the local community, which Jenks reckons could be the largest such deal on record. He adds that the very fact that Lufthansa is pioneering such a route is perhaps significant for another reason. "Almost always it has been BA that gets to a new US point before any other European carrier," says Jenks.
For its part, BA has been adding frequency back on to key routes out of London, centred around the 777. Notably, when Virgin announced an early morning third flight to JFK in October, BA followed instantly with a seventh daily 747 service of its own. By contrast, both American and United have shown net reductions.
Looking ahead to summer 2004 it seems possible that the US majors could begin to reduce the gap, as the effects of restructuring, war and perhaps even exchange rates begin to stabilise. By then too, on the European side, the recently announced fleet reduction plans by troubled Swiss will start to show.
But recovery or not, the transatlantic is set to remain a racy game. Not least, with the potential for further jockeying for position among (or within) the global groupings. Some big decisions are already pending, including the alliance choice for KLM. And next season too, the transatlantic manoeuvrings could have an added significance taking place against the backdrop of the US-European open skies negotiations.
REPORT BY KEVIN O'TOOLE IN LONDON
Source: Airline Business
