Fall Outlook: Fewer Flights, Sustained Fares

It’s earnings season again, and that means it’s time to gather round and listen to every airline talk about what’s happened and what’s next. After seeing some of the earnings call summaries, it sounds like demand will, as usual, plummet after the summer. But airlines are mostly continuing to keep from adding too many seats, and that means you shouldn’t sit around waiting for any incredible deals.

First, I should say that I can’t stand listening to earnings calls. They take forever and I don’t have the patience. That’s one of the many reasons I subscribe to PlaneBusiness. I can skim the transcripts, get some analysis, and spend a lot less time on it. Since PlaneBusiness is a subscription site, I can’t link directly to any of the info on there, but that’s where I pulled most of this.

One of the more interesting calls for me was Delta’s. These guys were very direct about the state of things. From PlaneBusiness:

[Delta CEO Richard Anderson] then said that where the airline cannot get the “necessary revenue increases to offset the increased cost of operating the flights” the airline is going to remove capacity — particularly in its post-Labor Day schedule.

“We have announced that we are reducing capacity by 4 points from our original plan for the second half of 2011. This will result in our post-Labor Day system capacity being down 4% year-on-year,” he explained.

In other words, things are looking strong enough for this summer that you won’t see much of a cut. But as soon as the summer travel hoardes are gone, the flights will go as well. The worst of it? Trans-Atlantic flying. There’s too much capacity there and it’s going to get hacked after the summer.

In addition, we’ve already been told that Memphis will be losing about 25 percent of its flights as the hub shrinks dramatically. Most of those will be Connection flights to small cities. We just had a Cranky Concierge client fly from Huntsville to Austin via Memphis the other day. I’m guessing that won’t be possible after Labor Day rolls around, but the details haven’t been released yet.

While Delta may have been the most clear about its plans, it’s a safe bet that others will follow along as well. Most other large airlines are following similar strategies of being very careful with having too much capacity out there. I say “most” other large airlines. As Delta made very clear on its call, it doesn’t see American acting the same way.

After a Wall Street analyst asked how Delta would defend its share of the corporate business in the face of American’s 21 percent capacity jump in New York and 8 percent in LA, Delta CEO Richard Anderson came back at him.

We are not going to focus on chasing market share. We are focused on operating margin because operating margin ultimately is what our shareholders want us to produce. And so trying to take market share with very poor operating margin and negative cash flow doesn’t work for Delta.

He ended this by saying, “This isn’t a hobby.”

Some very strong words there, and it shows a discipline that we haven’t often seen in this industry. Smart strategies like this mean that there is less of a chance of having a bunch of empty seats that need to be filled with fare sales. So if you’re waiting for that fall deal, it may not be so easy to find this year.

27 Responses to Fall Outlook: Fewer Flights, Sustained Fares

  1. iahphx says:

    What’s driving the capacity discipline is undoubtedly high — and unpredictable — fuel costs.

    The airline industry is a low margin business, so if you boost fuel costs 25%, you’re going to have to raise fares and deal with somewhat lower demand.

    BTW, I’m surprised the industry is not making a bigger deal about Wall Street’s obvious distortion of oil costs. In 2008, they started the StopOilSpeculationNow website and launched a modest push the reign in the speculation. While oil prices are (so far) still slightly lower now, the speculation has only increased during that time. It’s bad for both airlines and America, and they would be in a uniquely strong position to lead the fight to shut down the Wall Street oil game.

    • SEAN says:

      Wall Street is the hand that feeds business & if you bite the hand that feeds you, there are serious consequences. That’s why the airlines don’t challenge the oil traders & the roll they play in pricing even though it would really benefit them.

    • CF says:

      I’m with iahphx on this. It would be one thing, SEAN, if they had never challenged them but last time they fought vigorously. I don’t see what has changed since then.

  2. Scott says:

    Well kudos to Richard Anderson for actually making a bold statement. Gotta take a stab at what the other guys are doing every once in a while to keep those earnings calls interesting.

  3. “””””He ended this by saying, “This isn’t a hobby.” “””””
    ——–

    Gee did he just figure that out!

  4. I think a more accurate way of ending the report should be “…if you’re waiting for a Fall deal you won’t find it on Delta”. In my opinion, just because Delta is circeling the wagons doesn’t mean it will be a trend in the airline industry. I believe that – as usual – Delta is abandoning service (and its loyal customers) in certain areas of the country to better please its investers. This abdication of commitment and service just proves that one cannot count on Delta to support travel plans or regional service in the long (or short) term. Their loyalty and service to its passengers and Frequest Flyers continues to be an after thought. My vote is thumbs down on Delta.

    • Mike, where did Delta say that they’re abandoning a market? They said they’re going to trim capacity, and as Cranky said, they’re going to trim much of it from the Atlantic, thats a bunch of ASMs.

      • Nicolas, Please see paragraph 7 and 8 of the report. It is about as specific as it can be at this time. You can bet that there will be changes/revisions to Deltas plan as time progresses. It would be bad enough if it was only flights over the Atlantic.

        • Mike, first my name is Nicholas.

          Second, which report? If you’re referring to the blog entry, its likely what’ll happen is those passengers will be flowed over ATL, DTW, or MSP. Thats not abandoning a market as a market is any given city pair. Sure some of these for BNA aren’t non-stop anymore, but they’ll still have connectivity.

          • OK NICHOLAS, Yes, I am refering to the report in Cranky’s blog. I don’t know and can’t say what is “likely”, I can only comment on what is reported in the blog. It does appear that Delta will abandon some commuter flights (25%) feeding into Memphis. I cannot say if these travelers will have an option to comnnect to another Delta flight as normally these flights service airports with limited destinations.

          • Mike, exactly. Delta is abandoning some commuter flights into Memphis. I’d place a reasonable wager Delta is going to maintain service at those airports, either through another hub, or they might just be canceling a midday flight. Yes, which sucks, but if you want an airline that actually can serve their customers, they actually need to be making some money so they can invest in their product and people.

    • CF says:

      “just because Delta is circeling the wagons doesn’t mean it will be a trend in the airline industry”

      That’s not true at all. It is a huge trend, and it’s one of the main reasons that airlines have been able to maintain profitability in recent times. Airlines are not growing in the US (except for little guys). That has allowed fares to increase to levels needed in this fuel environment.

  5. Jim says:

    Somehow, I am highly skeptical of what Anderson said. There is no way Delta is going to sit around and watch other airlines take its passengers away, even if the margin on those passengers isn’t great. The margins will improve after demand picks up and/or the price of oil falls, and at that time, the airline that has the passenger base will be the most successful. It’s one thing to say that you are going to cut demand, but if Southwest, JetBlue and the like don’t go along with it, the legacy carriers aren’t going to do it alone.

  6. Shindig says:

    I’m an ATL based flyer who long ago abandoned any loyalty to DL when I started trying to redeem rewards for international travel at 331 days out. That was in ’06. When I fly west or to NYC it’s now usually AA. For travel to Asia on my dates in March ‘2012 they want 110,000 of my AAdvantage miles. DL wants 285,000! So much for my 27 years in the Skymiles program and a couple million accrued miles. Business requirements over the years meant splitting travel among different airlines but I never failed, being a little flexible, to get awards from UA, Continental and, my to-Asia awarder, AA. Not so with DL or their partners. On travel to Europe last March, booked in September ’10, the agent on the phone said they often don’t get ANY reward seats from their partners Air France/KLM!

    • Dear Shindig, you have just echoed ONE of my reasons why I abandoned the SKYMILES program – and Delta – years ago. It is almost impossible to get overseas flights withy Delta miles, and – if by some mistake – you do get availability be prepared to used many more (maybe double) miles to book a seat. Bait and switch? By that I mean to say that their Skymiles advertising is extremely misleading and has nothing to do with reality.

      Therefore, the current statement/report that DELTA is willing to abandon routes and seat availability on other routes leaving their loyal passengers high and dry is of no surprise to me. They are starting to resemble RYAN AIR regarding their treatment of passengers and their loyalty.

      • Kyle says:

        And yet I still had no problem getting a low mile reward ticket to London last December.

        And other airlines aren’t willing to abandon routes? Abandoning a route doesn’t leave loyal passengers high and dry. They are simply given a different routing, instead of connecting through Memphis they may now connect through Atlanta. Delta wants routes with good yields and good yields come from high paying passengers not Southwest or AirTran customers who look for a hundred or two hundred dollar tickets.

        • The bottom line is COMPETITION. It may be reasonable to think that Delta would try and save some of the passengers in the 25% projected cut (see blog) in Memphis. Naturally other airlines have and do change/cancel routes. However, in my opinion, Delta has really done a hachet job on international and domestic servive in one stroke. One thing ALL airlines share is the airlines that prosper and survive offer a dependable product that is convenient and economical. These are the airlines that attract and keep loyal customers. Some airlines that have captive audiences (i.e. NW -now Delta – in the mid-west) and can and have gambled that their customers have no where else to turn. In the end it is about how much a customer is willing to accept. Competition is a beautiful thing. Airlines that make mistakes create opportunities for others.

          Finally, I wonder if Delta is having financial difficulties in digesting the NW deal.

          • Hunter says:

            I’m kind of confused by some of the statements you’ve made in a couple of these discussions. You seem to take a personal affront that DL would have the audacity to cut unprofitable routes (still not sure the term “abandon” is fair). Then you throw DL into a comparison against other airlines that are successful because they provide a “dependable, convenient and economical product.” I’ll take a leap of faith and assume you’re talking about the likes of WN (not many other “successful” carriers out there right now). That hardly seems fair or relevant, as you’re decrying DL cutting routes from small airports into MEM; routes that WN wouldn’t touch with a ten foot pole.

            I can’t help but feel there’s some sort of axe to grind with DL on your part.

  7. SAN Greg says:

    Perfectly played to the audience Mr. Anderson. Bravo! Bravo!

    Seems to contradict why Delta decided to flood capacity out of Kansas City and add competing service out of the huge Omaha-DCA market after Frontier announced service to MSP from MCI.

    I know I sound like a Delta hater, but quite the contrary. What I am is disappointed that a month after utilizing SNA-JFK service a few months ago it was discontinued, and more recently after flying SNA-LAS last month the service is ending. But I understand, it’s all about operating margin. Totally explains the actions in the first paragraph. This isn’t a hobby after all.

  8. CP says:

    I’m not sure the claim against American is fair. Yes, AA has boosted capacity in LA and NY — however, these are two markets where they already enjoy a large presence, loyal customer base, etc. In other markets, AA has made huge capacity reductions — look at STL, SJU, and (to a lesser extent) SFO. All is line with AA’s announced strategy, which is to double-down in markets where they enjoy strength (DFW, NY, LA, MIA, ORD) and pull out elsewhere.

  9. Hunter, I have formed my personal opinions of several airlines over the years. Some are still flying, others not. I therefore have and still do compare several areas and qualities of service in this industry. Cranky has allowed us to use this blog to comment and share our opinions and, at times, experiences in air travel. There are a couple of airlines which I do try to avoid – if possible – due to past experiences, less competitive pricing, fee extorsion, troublesome hub locations or just plain bad customer consideration. Delta appears to have made a business decision making a 25% (per the blog) cut in Mem. Not a small thing. Additonal to the Atlantic cuts. All this to save funds. I wonder why they just don’t tuck it all in and just fly to and fro from Atlanta and save even more. If Delta wants to compete with the other major airlines one would think that it would plan to ride out the rough times like the rest.

    Finally, Hunter, I base my comments and opinion of Delta on one or more of the measures I have listed above. I hope this gives you some basis as to my comments on Delta. Thank you for letting me give a short explanation on my views to you. Don’t forget, this blog allows everyone to make an honest comment from the peanut gallery, some you may agree with, others not.

    • The plan to ride out the rough times is to pull down capacity. This is the same plan to ride out the rough times that the other airlines use, they’re just being more public about it.

      I’m sure the routes they’re getting rid of are the biggest lost makers in the system. If a company can’t get people to pay for a service enough to make it break even, why should they keep it?

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  11. John says:

    I want the airline to be profitable, and I want it to be big. I’m a stock holder. I understand the consumer wants the cheapest fair possible, but if a route is unprofitable, cut it out—the sooner the better. Those of you that want bargain bottom fairs—how much airline stock do you own? We criticize airlines for high fairs…we don’t want them to be profitable? How many of you want Apple to be profitable?

    • John, you or your family must work for Delta. I too am into the stock market and you must know that as an investor airline stocks are not normally seen as a “good return” investment. OR – you must have pulled from your “Vegas” fund to spin the Wheel of Fortune.

      The history of flight is littered with hundreds of airlines that couldn’t maintain a level of competitive pricing and found it very difficult to fill seats, which cost them loss of market and ultimately their business.

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