Delta Increases Capacity Cuts
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Andrew Compart
Citing the global recession, rising oil prices and the impact of the swine flu on demand in Mexico and Asia, Delta said it will increase its capacity cuts for international routes this fall to 15% -- five points higher than it announced three months ago (DAILY, March 11).
Delta also is increasing its domestic capacity cut as of September by one to two points, for a decline of 6%, which will result in a 10% cut in Delta's systemwide capacity. But it is the international service -- and transatlantic services in particular -- that is taking the brunt of the cutback by the world's largest airline.
The airline's transatlantic capacity will be cut by 20% because that market has shown the most weakness, Delta President Ed Bastian said in a presentation to the Bank of America-Merrill Lynch Global Transportation Conference. Also, Bastian said the "core base" of Delta's international capacity actually is being cut by 20% when 2009 service additions, such as Detroit-Shanghai, Salt Lake City-Tokyo and Los Angeles-Sydney, that add some capacity in its international markets are taken into consideration.
Routes falling victim to the capacity cutbacks, in what Delta is calling a service "suspension," include Atlanta-Seoul, Atlanta-Shanghai, Cincinnati-Frankfurt, Cincinnati-London Gatwick and New York Kennedy-Edinburgh. Delta also will be reducing weekly frequencies from Atlanta and Detroit to Mexico City, and postponing some previously planned seasonal service between non-hub cities and Mexican beach destinations. The airline also plans to use smaller aircraft in some markets, Bastian said.
In a memo to employees, Bastian and CEO Richard Anderson said the additional capacity reductions mean the airline must again reassess staffing needs. But they said they hope to again be able to use voluntary early-out programs to avoid involuntary furloughs of frontline employees.
Delta said it is making the bigger cutbacks in part because revenue is not showing any signs of recovery. It had expected some demand recovery in June, if only because that's what typically happens as the summer travel season kicks in, but "the reality is [that] we still haven't seen that," largely because business travel still has not come back, Bastian said.
The airline also expects to take a $125 million to $150 million hit in the second quarter from a swine flu-induced drop in demand -- but that's not primarily due to a decline in Mexico traffic. Bastian said the bigger impact for Delta has been on point-of-sale bookings in Asia, to which the flu has spread and where the memory of SARS and avian flu is still fresh. Delta's Pacific load factor dropped 12.1 points year-over-year in May as a 31.6% decline in traffic outpaced its 20.5% cut in capacity (DAILY, June 9).
Bastian said bookings there have started to pick up over the past two weeks, so the airline believes the impact is starting to recede. Whether his optimism is well-founded, however, may be tested by the World Health Organization's decision June 11 to declare swine flu -- or H1N1 as health officials prefer to call it -- a "pandemic" because of its worldwide spread.
The flu has not been particularly deadly and the WHO is not recommending any travel restrictions. But there could be a psychological impact and, also on June 11, authorities in Hong Kong ordered the closure of all elementary schools, kindergartens and day care centers in the city after 12 students were found to be infected with the virus, CNN reported.
In any case, the global recession and the current swine flu impact on travel demand in Asia are contributing to Delta's new projection of a 20% decline in passenger unit revenue and 16% decline in total unit revenue for the second quarter. The airline also is now predicting an operating margin of zero to 2% in the quarter, excluding special items, revised downward from its April guidance of 4% to 6%.
Photo credit: Delta Air Lines
