Are airlines acting rationally? January 2000

The tentative answer is “probably yes”, according to an analysis of 2000 capacity plans on long haul routes carried out by Credit Agricole Indosuez Cheuvreux*.

For the first time there is evidence that the industry is putting in place a very significantly reduced level of capacity growth for the summer of 2000 compared with 1999. In the short term, the winter season 1999/2000 is likely to remain difficult, with increases of capacity on the Atlantic of 10%. For the summer season 2000 however, it appears that capacity on the North Atlantic will increase by only 6.2% in Q2 and by only 0.4% in Q3.

South Atlantic capacity plans show marked reductions of 2.9% and 6.3% in the same periods.

At the same time there appears to be only cautious increases of capacity onto the Pacific, where capacity appears to be growing by 4.2% in the Q2 and 1.0% in the Q3, after only modest increases in 1999.

On Europe–Asia, capacity growth plans are showing reasonable optimism with 5.1% and 4.3% increases in capacity in the second and third quarters, as the region’s recovery manifests itself.

As always, some important caveats have to be added. The analysis is based on OAG data on non–stop flights (excluding code–share duplication). The airlines, of course, are not committed to the schedules they have filed with the OAG, and the second and third quarters of 2000 could well be modified. But, at present, these capacity numbers show what the airlines expect to operate.

The North Atlantic

The North Atlantic was the area of greatest concern in 1999. There have been two main factors — a switch of capacity from Asian and Pacific routes that had suffered in the previous year, and an element of "catch–up" by the market trailers.

Specifically, Lufthansa (sticking to its five–year plan) took delivery of long haul aircraft, increased transatlantic frequencies and opened new destinations in the US, thereby increasing capacity by 16.2% in 1999. Air France took advantage of the opening of the third runway at CDG and the opportunities provided by the signing of the new Franco- American bilateral in 1998 after seven years of operating capacity–constrained without an underlying bilateral air service agreement. This resulted in a 17.0% increase in their transatlantic capacity.

Alitalia’s capacity jumped 35.9% when it took advantage of the opening and build–up of the new hub at Malpensa and the release from EC shackles.

BA had increased capacity strongly in 1998 by 14%, in part a defensive move in anticipation of the EC requiring it to give up slots at Heathrow in exchange for the approval of its alliance with American, and as an offensive move against the possibility of a new open–skies agreement between the UK and the US.

With a commanding market share of 14% of the non–stop market on the North Atlantic, BA experienced the greatest bottom–line impact of the global shift in capacity in 1999.

Its response was its downsizing /higher yield strategy (Briefing, September 1999), which started to take effect from the third quarter of 1999 and will really show up in 2000. Planned North Atlantic capacity increases only 0.2% in the first quarter and declines 0.9% and 1.6% in the second and third quarter, respectively.

KLM was also badly hit by the increases in competition, but the effects are distorted by comparisons with the period in 1998 that included the impact of the strike at partner Northwest. KLM/Northwest were busy readjusting the joint venture capacity in the first half of 1999, but now approaching equilibrium, have cut back growth plans for next year. This is offset to some extent by a strong increase in capacity planned by fellow alliance partner Alitalia.

According to the schedules, Swissair will still be looking for a 10% growth in capacity through next summer (albeit mitigated by flat capacity from JV partner Sabena), presumably trying to recover from the dissolution of the Atlantic Excellence Alliance.

All the US Majors expanded capacity markedly in 1999. But 2000 will be characterised by consolidation with very modest growth rates, according to the planned schedules. US Airways, developing from a small base, is the exception.

Oneworld and Star remain neck and neck with 25% and 23% share of capacity respectively. However, while BA and American are forbidden from co–ordinating on the Atlantic, oneworld is at a disadvantage.

Canadian's 1% share of the North

Atlantic will remain oneworld capacity pending the eventual integration of Canadian into Air Canada. With British Midland also in Star Alliance, Star will be in a similar position at Heathrow as that enjoyed by United and American at Chicago. This underlines the ridiculousness of the regulators' focus on the local competitive impact of the proposed BA/AA alliance. In the end it may allow the regulators to soften their approach. Overall, it looks like 4% growth in capacity on the North Atlantic in 2000.

The South and Mid-Atlantic

The South and Mid–Atlantic markets have had a very high rate of capacity growth, 16.1%, in 1999 mostly due to the market leaders Air France and Iberia switching multi–stop flights to direct flights. In the second quarter of 2000 most European carriers will be cutting back severely in response to overcapacity.

The main exceptions are the new alliance members Air France and Aeromexico who are aggressively increasing capacity to further develop their non–stop product.

Together with Delta they increased capacity by 14.0% in 1999 and are scheduled for double digit growth in 2000.

BA pumped capacity into this market in 1999 but looks as if it will be taking much of that increase out in 2000.

There is a marked contrast in the plans of the two main Latin American carriers. Aerolineas is going for very rapid growth while financially–troubled Varig is retrenching. Overall there should be little change in capacity between 1999 and 2000.

Europe-Asia/Oceania

On the direct routes from Europe to Asia, there has this year been a noticeable shift in power. European carriers as a whole have cut capacity while the Asian carriers have expanded.

It looks as if BA has lost its market leader position which it had in 1998 to SIA which in 2000 will have about 11% of the capacity (Virgin Atlantic’s share is around 2%).

Again Lufthansa has maintained operations where others cut, and is currently reaping the benefits of the faster than anticipated recovery in the region. Cargo is producing very positive numbers that should assist in improving weak overall yields.

Overall non–stop capacity on offer has grown by only about 3.6% in 1999. In 2000 4–5% growth in capacity is expected, again pretty modest but the highest rate of the four main long haul sectors.

The Pacific

Although capacity was shifted away from the Pacific to the Atlantic in 1999, the market still increased by 3.0%. This was due primarily to the new bilateral treaty between the US and Japan whereby the carriers had to "use or lose" the newly allocated slots.

The market leaders — United, JAL and Northwest — controlled 44% of capacity in 1998 but as the new entrants, most visibly American, have expanded rapidly they have been forced to concede market share.

American looks as if it will be consolidating in 2000 while the growth rates of the other Majors will be modest or non–existent. Delta’s decline reflects its withdrawal from some markets.

Korean and Asiana are showing a remarkable recovery from their deep crises. Qantas, in readiness for the Olympics, will be boosting capacity in 2000. Overall though Pacific market capacity may only grow by 3–4% in 2000.