United, American and Continental Airlines are leading a major round of capacity cuts in the US domestic market
Dramatic cuts unveiled by US majors in the past few weeks have erased a decade of growth.
Credit Suisse analyst Dan McKenzie says that the cumulative effects of the cuts at American, Continental and United have had the effect of removing 10 years worth of expansion, but it remains to be seen if the cuts will be enough or if they will spread to all major carriers. Domestic seating will decline by at least 10% this autumn compared to last year at American, Continental, Delta and United. American, Continental and United all unveiled plans in late May and early June to slash capacity while Delta's plan was detailed back in March.
The deepest cuts - at United - remove 100 aircraft or about 25% from the carrier's fleet and end its ill-fated experiment at an internal discount unit, Ted. About 80 of the aircraft will be grounded in 2008 and the remaining 20 in 2009. As a result United will cut 17% to 18% of its domestic capacity in a move FTN Midwest Securities analyst Michael Derchin calls "extremely bold". The airline is removing its entire 94-strong Boeing 737 fleet, which consists of older "classic" models, and will replace them with the 56 Airbus A320s that it had used in its Ted operations. It is also parking six of its 747-400s.
United's capacity cut "is a far more meaningful step in the right direction than we had been modelling for", says Jamie Baker of JP Morgan. The cuts should bolster United's liquidity to almost $1.5 billion by year-end 2009, and so the steps "are clearly a proof positive of United's survival intent and welcome news from a management team that hasn't been universally viewed as in the forefront of active management".
Continental's cuts entail eliminating all its 737-300s and most of its 737-500s. It will cut 3,000 of its 45,000 jobs and eliminate about 11% of domestic capacity starting in September. The carrier is also closing 15 stations, including three in Latin America and Cologne in Germany. Significantly, Continental's two top executives, chief executive Larry Kellner and president Jeff Smisek, declined their entire salary and all bonuses for the rest of this year.
American's pilot union, the Allied Pilots Association, promptly pointed out the stark contrast to American's executives' bonus plans. American is parking a significant portion of its ageing Boeing MD-80 fleet and will also ground some 40 to 45 of its Embraer regional jets and its 26 Saab 340 turboprops. In connection with that move, it will slash flights at its San Juan, Puerto Rico, hub from 55 to 33 this autumn. That includes flights from major mainland cities as well as connecting flights throughout the Caribbean. Although JetBlue Airways promptly moved in and announced a significant Puerto Rico expansion, some on the island are worried about the lack of lift and see San Juan's status as a cruise hub being threatened.
So far Northwest has only decided to cut capacity by 5%, a reduction announced in April, and US Airways is only planning a 4% trim. But Derchin says: "The pressure is on them. They'll have to do something."
Airline securities analyst Jim Higgins of Soliel Securities adds: "The more capacity cutbacks, the better. We estimate that the industry needs to reduce domestic capacity by 12% to 15% in order to be cash-flow breakeven."
That estimate is based on a year-end 2007 baseline, and with oil rising, "we'll need more cuts to maintain cash at last year's comfortable levels".
For more on the dramatic capacity cuts in the USA, read Dave Field's blog at flightglobal.com/leftfield
Source: Airline Business
