At first glance, it would seem that the North Atlantic is set for another summer of aggressive growth. Last year, as capacity flooded onto the market, 30 new daily flights were added between the USA and Western Europe. As the majors put the finishing touches to their plans for the season ahead, the evidence is that the number will be higher still. But these new launches tell only half the story. While there may be more new services in prospect, there are more being dropped, too. In short, the picture looks more like one of repositioning, encouraged by defensive moves and the shifts within airline alliances, rather than simple expansion.
A degree of volatility is perhaps to be expected as carriers experiment with the new freedoms allowed within a largely deregulated market. Even during the gangbuster summer of 1999, a number of services were quietly dropped as others started up. But this year there is more churn than in most. Overall, 18 daily flights are due to fall out of the timetable. It is these deletions that are arguably the most distinctive feature of this year's summer schedule. Setting these against the 32.5 additions leaves a more modest net gain of 14.5 dailies (see tables opposite and over page).
That helps to explain the more muted capacity growth in prospect this year, despite the new launches. Early schedule returns to OAG show that as the season reaches its height in June, the capacity on the North Atlantic (including Canada) will be growing by just under 5%. That is less than half the hike registered in the mid-season peak last year. For 2000 as a whole, analysts expect to see capacity growth of under 6% on transatlantic markets.
A detailed look at the schedules is illuminating. It highlights vividly the difficult judgement calls that network planners face in balancing financial prudence against market share objectives. But where do global alliances fit into the equation? While alliances are certainly the context within which all key decisions are made, they are not yet changing basic airline decision-taking processes. There are exceptions to this rule, such as KLM's tight transatlantic co-ordination with its long-standing partner Northwest Airlines. But the general observation holds true.
A significant component of this year's volatility is alliance churning. Since last summer, the Swissair/ Sabena-led Qualiflyer grouping has lost Delta Air Lines to Air France and seen Austrian Airlines head to the Star Alliance with Lufthansa and United Airlines. Following the Delta defection, Swissair swiftly announced a new alignment with American Airlines. Meanwhile, Alitalia's partnership with KLM has brought it into partnership with Northwest. Together, these changes account for nine of this summer's new routes and five of the deletions.
One obvious feature of a shift of alliance allegiance, is a corresponding shift in hubbing strategy. This explains Austrian's entry into the United Airlines hubs in Chicago and Washington. Similarly, Sabena is withdrawing from the Delta hub at Cincinnati. But an alliance shift can also have the opposite impact. Delta's departure from Qualifyer allowed it to enter the New York-Zürich route in competition with its erstwhile Swiss partner. American's link with Swissair caused it to close Chicago-Zürich, which it will now offer via Swissair, while starting a new Dallas-Zürich service.
Broader regulatory factors also continue to exert their influence over network strategies. Italy's new open skies bilateral with the USA is an example. Rome has been the main beneficiary, with new flights from American and Northwest. The gradual phase-in of open skies under the US-French bilateral has resulted in only four new flights and a pair of substitutions as carriers attempt to optimise their capacity within the set limits. From Paris, US Airways replaces a second Philadelphia flight with a service to the Charlotte hub while United switches from a second Chicago flight in favour of Los Angeles. Innovation remains most limited in the US-UK market as bilateral negotiations continue to drag. Even British Midland's modest proposal to re-enter the transatlantic with United codeshare flights from Manchester to Chicago and Washington has been blocked by the current regulatory impasse.
Strategies within individual airlines also affect the overall picture. British Airways and KLM, concerned at poor financial results, will continue to cut capacity this summer. Other Europeans, too, are trimming growth to repair yields, although a handful led by Air France and Virgin Atlantic remain in double figures. TWA's withdrawal from key markets suggests that its long-predicted full pull-out from Europe cannot be far off. Delta has also relinquished Stuttgart-New York and Hamburg-Atlanta in the face of strong hub-to-hub one-stop competition from the Star Alliance. Continental, despite offering no new routes to Western Europe, is adding transatlantic capacity by doubling Tel Aviv frequency and phasing in the Boeing 777.
Compete or consolidate?
Analysing the additions and deletions of individual routes, it is possible to gauge whether the overall market is moving towards increased competition or consolidation. There are two different grounds on which that measurement can be taken.
The first measure addresses the extent to which alliance partnerships are prompting consolidation. That effect is at its strongest when carriers emphasise "hub-to-hub" routes. Although such routes may increase competition in one-stop and certainly in two-stop markets, they can be monopolistic in their impact on the local market linking those two particular cities. Clearly, no other alliance can hope to replicate the hub-to-hub advantage on that inter-hub route. In the mid-1990s some alliance protagonists went so far as to say that hub-to-hub routes would increasingly dominate. But this has not been the case, and will not be this summer. Only 11 of the season's new routes are hub-to-hub, while the bulk are hub-to-spoke.
As the "spoke" is typically on the home turf of a rival carrier, hub-to-spoke routes typically enhance competition. A case, it appears of competition rather than consolidation.
The second approach is to look for more general signs of a drift towards either consolidation or fragmentation. The new transatlantic routes can be broadly placed into four categories: the addition of capacity by a carrier already on a route; the cross-incursion into a route already operated by another carrier; a new route linking cities that already have some transatlantic service; and, lastly, a new route offering a city's first-ever transatlantic service. On this analysis (see table above) the impression is that the market is tending more towards consolidation than expansion. Most of the net growth this summer is from carriers adding capacity on routes already operated, with New York's Kennedy the main beneficiary. The number of cross-incursions is not much greater than the number of such routes being dropped.
Whether that represents good or bad news depends on where you stand. Financial markets appear inclined to favour consolidation, believing that this is likely to increase profitability. What might be called "market expansion" interests, such as tourism, airports and, to some extent, airline marketing departments, are perhaps more inclined towards a proliferation of service. They observe that the marginal tourist only flies if the price is right - if not they stay at home.
Such tourism and airport lobbies may not seem relevant to financial analysts. In a recent SalomonSmithBarney report, analyst Brian Harris argues that US airlines financial interests are best served by hub consolidation. That could result in fewer transatlantic city-pairs. However, market expansion interests are, albeit indirectly, the voice of the consumer, and as such have actual or potential influence on governmental competition policy, that can in turn affect how the ground rules within which "consolidation versus competition" is played out.
For now, the airlines may be inclined to side with the analysts. Their main objective this year is an improvement in yield. Despite the volatility of the summer schedule, the changes result in no net addition of new cities. However, three new cities will receive carefully strategised first-ever transatlantic services from a major airline. They include Lyon and Venice, courtesy of Delta and Virgin's Las Vegas link. New cities can present arbitrage opportunities to capitalise on under-served high yield flows, undermining the more normally perceived, but sometimes exaggerated, linkage of profitability to route consolidation. For this reason the financial performance of this summer's routes to new cities will be closely watched by airlines as well as the financial markets.
| Change in daily flights -summer2000 versus 1999 | |||
| New frequency/service | Added | Dropped | Net addition |
| Existing route and carrier | 13.0 | 3.5 | 9.5 |
| New route for existing carrier | 13.0 | 3.5 | 9.5 |
| New City pair | 9.5 | 8.0 | 1.5 |
| First transatlantic link for city* | 3.0 | 3.5 | -0.5 |
| TOTAL | 32.5 | 18.0 | 14.5 |
| NOTE: Summer 2000 taken form timetable announcement compared with summer 1999 actual. *Denotes a new city pair in which a city receives its first ever transatlantic daily service. Source: Airline/Aircraft Projects | |||
| Top 20 North Atlantic Carriers - OAG scheduled data PROVISIONAL JUNE | |||||
| Airline | Weekly capacity *ask million change % | Weekly frequencies Nominal total** | Weekly seats offered Thousands change% | ||
| British Airways | 1,338 | -2.3% | 606 | 203 | -2.3% |
| Delta Air Lines | 844 | -1.3% | 568 | 125 | 0.7% |
| Lufthansa | 819 | 5.1% | 348 | 113 | 5.9% |
| United Airlines | 806 | 6.9% | 420 | 116 | 3.6% |
| American Airlines | 721 | 1.4% | 518 | 108 | 0.4% |
| Air France | 641 | 16.3% | 324 | 95 | 17.7% |
| Virgin Atlantic | 529 | 10.0% | 212 | 80 | 9.8% |
| Continental Airlines | 515 | 4.5% | 322 | 83 | 4.4% |
| Northwest Airlines | 476 | 19.6% | 238 | 74 | 18.6% |
| Air Canada | 400 | 7.0% | 290 | 65 | 6.9% |
| KLM | 391 | -4.2% | 172 | 55 | -6.2% |
| Alitalia | 328 | 9.3% | 144 | 45 | 9.7% |
| Swissair | 289 | 7.4% | 190 | 41 | 6.1% |
| US Airways | 255 | 30.8% | 182 | 41 | 29.8% |
| Aer Lingus | 181 | 17.5% | 106 | 33 | 13.4% |
| Sabena | 178 | 2.9% | 110 | 29 | 4.9% |
| SAS | 156 | 16.4% | 98 | 24 | 16.9% |
| Iberia | 140 | -5.4% | 71 | 21 | -6.3% |
| Canada 3000 | 130 | 12.1% | 71 | 22 | 8.2% |
| TWA | 95 | -35.8% | 70 | 15 | -35.2% |
| Total | 10,203 | 4.7% | 5,604 | 1,536 | 4,7% |
| Data is based on schedules for 19-25 June, 2000 provisional schedules filed with OAG by April, compared with actual filings for 21-27 June, 1999. *ASK=Availiable seat kilometre 1 mile=1.6km **Frequency data are for the specified week only and will exclude "summer" services added or dropped at other times during the season. | |||||
Source: Airline Business
