Airlines: Capacity Cuts Go Abroad

Posted by: Justin Bachman on March 10

The airline capacity reductions that commenced last year are being reprised for 2009, this time with a global focus. Both Delta (DAL) and United (UAUA) released details Mar. 10 of deep cuts planned for this year at an airline investors conference hosted by JP Morgan Chase & Co. Delta, the world’s largest airline will chop international capacity by 10% after the summer, while United is cutting by 15% on the international side. American Airlines (AMR) is trimming international by 2.5%, but another 9% domestically.

The cuts come as fearful businesses and consumers reduce travel, with the capacity cuts the latest sign that the global economy isn’t likely to rebound before 2010. Moreover, airlines that had turned to markets abroad to help bolster financial results – with few as aggressive as Delta in that regard – now have little in the way of a safe harbor. No market is immune. The pace of the traffic declines has in recent weeks clouded what was previously thought to be a relatively decent outlook for the industry this year. As recently as January, most analysts had expected overall profitability, but the depth of the recession and consumers’ reluctance to spend outside of necessities has made full-year losses more likely for some carriers.

The same day the domestic carriers were announcing cuts, Lufthansa AG, reporting its February traffic, also said its deepest cuts will come from North and South America. The premium cabin is also not buttressing profits, as high-end corporate and affluent travelers are beginning to trade down. United has taken a high-profile recently in boasting about how deep and rapidly it is reducing premium cabin seats, which will be down 20% this year.

The Delta cuts – and like-minded moves by similarly-pinched U.S. rivals – will almost certainly spark further job losses for the industry. “As in the past, voluntary programs are always our first consideration to adjust staffing needs,” Delta’s CEO and president, Richard Anderson and Ed Bastian, wrote in a memo to workers.

What is less clear is the effect this international retrenchment will have on Delta’s seven hubs, especially the five that do not have the enormous feed traffic of Atlanta and New York-JFK. If one assumes Detroit will retain the bulk of Delta’s Asian operation, at least for the foreseeable future, that leaves a murky future for business travelers and employees in Cincinnati, Memphis, Minneapolis and Salt Lake City. Already some are writing the obituary for Cincinnati as a Delta hub, given its history of sticker-shock airfares and proximity to low-fare carriers in Columbus and Dayton. Cincinnati will see one-quarter of its flights disappear by June compared to the previous summer, according to USA Today, citing flight schedules compiled by OAG, a London-based firm that provides airline and cargo data. Delta spokeswoman Betsy Talton says the carrier has no details yet on which routes (hubs) will be affected.