12 June 2009

Once Was Not Enough - Airlines Cut More

Twice was not enough
Will the third round of cuts be enough to bring capacity inline with demand?

Just in time for the Paris Air Show next week we see another dose of (new and really real this time) reality hitting the market. Pursuing the conventional pendulum (aka knee jerk response) to a down turn - we are watching another round of cuts take place in the market. Delta and American shaved another 1-3 points off their capacity in total for the post Labor day schedule. BA is warning of cuts across the board from labour to shuttering OpenSkies. In this month's Air Transport World, Editor Aaron Karp ("Were They Tough Enough? " - http://www.atwonline.com/magazine/currentTOC.html ) makes the case that the bloodletting at the end of 2008 and the first quarter of this year was just not sufficient for the airlines to sustain their business model. The empirical data in support is stark. Yields are in the toilet. US travel agency derived airline passenger revenues were off almost 30% in the month of May 2009 on only a less than 9% drop in passengers. That is pretty bad by any measure.

Those of you who are regulars of this blog will recall that I singled out United last year for not cutting their head count costs commensurate to match the reduction in their fleet.

Now we see the new Boeing CMO 2009-2028 being released and for the first time ever (as far as I can tell) the plane maker is actually cutting its long term forecast. So the pull back is not just temporary. We are seeing a structural change in the market.


As an aside here it is a great tool and this years version is much easier to use and gives better quality data.

With oil prices rebounding and headed north of $100/ppb, the spectre of the gas guzzling uneconomic fleet is rising again. with effective deflation, rising costs and still declining demand - the airlines are in this perfect storm of bad news. As Willie has exhorted his boys and the rank and file - standard solutions and behavior are not acceptable. However I wonder if the rhetoric matches the execution. And of course while BA is a poster child for this perfect storm of bad news but they are by no means the worst and the sole victim of this situation. At least BA has the ability to control much of its own destiny (Unions willing we think!).

So chaps - brace yourselves for the long haul. There will be more cuts and more belt tightening.

However - while this would be a good time to think about how to radically change the airline cost model not just applying the scalpel, I am just not seeing any evidence of this occurring. Chaps - wake up and smell the coffee. You are being presented with a golden opportunity to make your businesses stronger for the long haul.

Not taking this chance means that the airlines are going to be condemned to having to cut again, and again... Then the opportunity missed will be looked on as a luxury! I hope that in future time I wont have to write about the time when the airlines missed their golden moment.


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