US Airlines' Downsizing Shows During Blizzard

December 30, 2010

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US airlines are well positioned to absorb costs of the East Coast blizzard that stranded thousands of holiday passengers this week, but they might be less lucky if the same type of storm hits next month when business travel picks up.

The airlines lack excess aircraft sitting around to pick up slack and move more passengers. That is by design, to meet softer demand during the recession and cope with high fuel prices.

"If something like this were to happen again in a non-holiday period, then I think the damage would be much greater," said Bob McAdoo, a senior airline analyst for Avondale Partners in Kansas City, Missouri.

Most passengers stranded this week need to get home from the holidays. Less flexible business travellers are more likely to cancel than reschedule, eating into airline revenue and overriding any fuel savings from cancelled flights, several analysts said.

Helane Becker of Dahlman Rose puts this week's storm costs at about USD$100 million to USD$150 million, though most analysts are reluctant to peg a number.

Several airlines, including Delta, JetBlue, United and Continental, said they have not yet estimated costs.

"It is too early to tell," said Mateo Lleras, a JetBlue spokesman. "However, should the weather system present material costs to the airline, we will most likely disclose them in our Q4 earnings call" on January 27.

Christen David of Continental Airlines said the winter weather did not come as a surprise. "Airlines anticipate that severe weather will affect our winter operations, and that is accounted for in our planning," David said.

US airline flights are 80 percent full on average, and during the holidays they run close to completely full.

Flights were only about 70 percent full before the fleet downsizing as recently as 2002, McAdoo said, so if flights are cancelled for a day or two it now takes the airlines much longer to find travellers an empty seat on another flight.

The cutbacks came as domestic airlines lost nearly USD$54 billion this decade, according to the Air Transport Association of America, which has not estimated this blizzard's costs.

"Ultimately, the benefits from lower capacity are far, far more beneficial to the airlines than the impact of not being able to accommodate a few more passengers in a fluke event like this," said Hunter Keay, a senior analyst at Stifel Nicolaus in Baltimore.

Available seat miles fell 6.9 percent last year, the most since a 16.2 percent drop during World War Two in 1942, the ATA said.

"We had a global recession, the worst recession since the Great Depression, the highest fuel prices in the history of aviation, the volcanic ash issue, H1N1 and various terrorist threats" that propelled airlines to cut flights, said ATA spokesman David Castelveter.

US domestic capacity based on available seat miles has fallen 10 percent over 10 years, with a modest rise in the first quarter of 2011, he said.

"Carriers don't add capacity and allow it to sit waiting for a weather event," especially as fuel prices rise, Castelveter added. "If they were to add capacity, it would be to meet demand and be used to fly passengers and generate revenue."


Fewer flights and empty seats may mean higher ticket prices and fees and less elbow room for travellers.

But until the economy shows more meaningful growth, domestic airlines are unlikely to add much capacity.

Once the snow melts, the reduced capacity is seen reinforcing pricing power for the airlines.

"I would happily accept more capacity cuts and take the risk of not being able to accommodate more passengers in the long run for the bigger-picture benefits," Keay said.

Airlines are still in a "sweet spot" to take advantage of tacking on baggage and other fees to compensate for rising fuel prices, he added. "Lower capacity has a benefit for let's call it 350 days of the year, and it maybe hurts on 15 days."

Stifel Nicolaus has a positive airline industry outlook for 2011, largely because of "capacity discipline" and added fees.