The message given to the 250 delegates at this year's Network route planning event for the Americas is that while there are opportunities for strong traffic growth, profits are tougher to find
With traffic storming back, aircraft orders on the way and new domestic and international service coming on stream, the only missing ingredient for most carriers at this year's Network 2005, hosted by Orlando International Airport, is profit. Unfortunately, this most vital business component is proving elusive in the face of high oil prices and intense competition. And, as Gary Chase, lead aviation analyst at Lehman Brothers, notes: "This is the upcycle."
The record attendance at Network 2005, the fifth in the event's history since it began to bring American airline route planners and airport marketers together in 2000, saw nearly 50 carriers and more than 100 airports gather in Orlando in March.
The role of incentives
Many airports have good reason to be optimistic about attracting new service, and incentives continue to play an important role in tempting carriers. "We have so many equal opportunities on the revenue side, it is going to come down to who offers the best deal," says Adam Green, manager route planning at JetBlue Airways. The sums offered by airports and communities range from $10,000 to $1 million, says Michael Preissler, general manager network analysis at Delta Air Lines. Most come in with packages worth from $100,000-$150,000.
The opportunities to spend such sums still abound. "There is plenty of low-cost carrier growth left for airports," says Doug Abbey of The Velocity Group consultancy, with only the "low-hanging fruit" already harvested. His advice to airports is to "think big" and try to attract a low-fare player that is prepared to develop a significant network.
This, says John Kirby, director strategic planning at AirTran Airways, is the year when US carriers, especially low-cost players, will decide whether they are going for market share or profit. "Some carriers will fight for small markets like Texarkana as much as they will for Los Angeles," he says, citing the small town on the Texas/Arkansas border as an example of a market that is perhaps less of a prize in a fight. "So we're looking for markets that can sustain a portfolio of service" – those that handle several flights a day.
Such action is needed in what Kirby calls an atmosphere that is "hyper-competitive across the board, in all markets, all the time". This level of competition is unlikely to be eased by a carrier failure. "Basically it's tough to kill an airline," says Green. "All of our plans are built on the assumption that nobody is going out of business." Despite some dire predictions about the survival prospects of US Airways, Chase says: "There won't be a failure in the next 24 months. I am stunned at this industry's ability to continue to attract capital."
Low-cost carriers are making moves on to traditionally secure legacy carrier turf, and with the arrival of its 100-seat Embraer 190s later this year, JetBlue will have the tool to enter more new markets. "This aircraft will enable JetBlue to bludgeon legacy carriers at their last bastion – medium-sized airports," says Abbey.
AirTran, on the other hand, begins service at Charlotte in May. This move is being watched widely because it is the strongest low-cost carrier incursion into the US Airways fortress hub so far. Charlotte, where US Airways has a 90% market share, is second among dominated hubs to Delta's 92% share at Cincinnati, where no low-fare player has yet dared to venture.
JetBlue growth
Even though AirTran could double its size in the next four years, its steady growth pales in comparison with JetBlue's. Green said that it is up to 72 Airbus A320s and will be at 84 of the 156-seaters by year-end, then adding about 15 Airbuses a year. The carrier will receive eight Embraer 190s this year and then at least 18 a year for five years. For airports pitching for JetBlue service, the 190s need between 200 and 600 passengers a day each way to justify service, says Green. "There are plenty of opportunities to stimulate traffic, both on the price and on the service side. We don't want to come in with just one flight."
New service is far from restricted to the low-fare carrier. Although Delta's mainline fleet size will remain stable, there is scope for considerable regional jet growth for several years, says Preissler. It will add five new destinations with 50-seaters over the next few months.
Traffic for the US majors has nearly recovered to pre-11 September levels, says Dave Swierenga, president of the AeroEcon consultancy, and it has exceeded these levels if regional and partner airlines are included. However, yields have dipped and breakeven levels have been driven up by higher fuel prices and rising labour costs. Average annual wages per employee have climbed from $55,000 in 2000 to nearly $70,000 in 2004, says Swierenga.
As both legacy and low-cost carriers seek growth opportunities, there has been real convergence on labour rates between them, says Chase: "Fuel aside, the industry is in better shape than it has ever been." However, unless fuel prices collapse, the economy tears away or there is a material capacity reduction in the market, the legacy carriers will most likely be going back to labour for more concessions this year, he adds.
It will take time for profitability to return, despite solid traffic growth for the coming years. US carriers will end up losing $8.3 billion net in 2004, says Swierenga. He estimates this will be followed by a $3.5-4 billion loss this year and a $2-2.5 billion deficit in 2006.
MARK PILLING AND DAVID FIELD ORLANDO
Source: Airline Business
