Soaring oil prices have pushed major U.S. airlines to lop off about 10 percent of their seat capacity, roughly equaling the greatest previous cutbacks, seen in the months following the 2001 terrorist attacks.
On Thursday Continental announced an 11 percent reduction. That news came a day after United said it would ground 70 planes and discontinue Ted, its coach-only service. In March Delta said it would cut capacity by about 10 percent in the second half of 2008, and two weeks ago American announced a cutback of 11 percent to 12 percent to take effect after the summer.
Fewer flights translate to higher fares, which already have been rising fairly steeply. The airlines’ revenue per available seat mile (RASM), a widely used performance barometer, can be expected to rise by about 30 percent as a direct result of the cutbacks, according to Ray Neidl, an aviation analyst with Calyon Securities.
The fares themselves won’t go up that much, on average, because RASM takes into account the retrenchment in seats. And leisure travel is likely to feel more of the brunt than business travel, for which demand is comparatively inelastic. But Neidl says business fares will rise as well, and companies can be expected to reduce their overall amount of travel to some degree. Typical strategies will include shortening the duration of trips to save on hotel and meal costs; sending fewer employees on some trips; and making more use of teleconferencing and videoconferencing options.
For essential business travel, further costs will be incurred: the flight cutbacks mean it will be harder to book the flight you want — unless you’re willing to pay full fare. Those who are should have few problems with availability.
A silver lining of sorts is that with fewer flights, the congestion problems seen at many major airports recently should clear up somewhat. But that won’t provide much consolation to employers, considering that airlines probably aren’t done paring flights. “They’ll need further cutbacks if oil is going to stay at $130 a barrel,” says Neidl. Oil prices may decline after the summer is over, but they are not expected to return to the levels seen just a few months ago for the foreseeable future, if ever.
And if oil maintains its historic high level, a drastic solution to the airlines’ turmoil could emerge. “It might take one of the major airlines having to liquidate,” observes Neidl, “though I don’t see that happening this year.”
Having fewer players in the field would reduce the likelihood that airlines would undo their flight cuts if oil prices did fall significantly. The high-fixed-cost nature of the airline industry puts a high premium on filling seats however possible, but severe competition in this commodity-like industry continually causes the players to employ pricing and service strategies that end up harming more than helping.
In addition to Continental’s flight cuts, the airline says its two top executives, CEO Lawrence Kellner and president Jeffrey Smisek, will give up their pay for the rest of the year, the Associated Press reports.