DL cuts capacity by 2%

[FrugalFlyerv2.0]

Delta Air Lines Inc. (DAL) on Tuesday dropped plans to boost flying this year and instead will cut capacity 2% from 2010 levels as it digests rising fuel costs and the potential loss of up to $400 million in profit from the crisis in Japan.

The Atlanta carrier has the largest presence among international airlines in Japan, deriving $2 billion a year from flights going through its Tokyo hub, and expects earnings to be cut by $250 million to $400 million as traffic fell in the wake of the country's multiple disasters.

Ed Bastian, Delta's president, said at an industry conference that the depressed Japan traffic likely would last for six to nine months before recovering with reconstruction efforts. It is cutting Japan capacity by 15% to 20% through May. Delta also anticipates domestic flying down 3% this year over 2010, reversing plans outlined in January for a 2% expansion.

United Continental Holdings Inc. (UAL) and the American Airlines unit of AMR Corp. (AMR) have trimmed their own 2011 capacity plans in recent weeks and on Tuesday were joined by US Airways Group Inc. (LCC). Southwest Airlines Co. (LUV) Chairman and CEO Gary Kelly bucked the industry trend and said at the conference that it was keeping its plans to boost flying by 4% to 6% this year.

wsj link

 

[WorldTraveler]

http://www.sec.gov/Archives/edgar/data/27904/000101968711000926/delta_8k-ex9901.htm

Here is a link to DL's SEC filing which was its presentation at the JP Morgan investor conference.

High fuel prices almost always lead to reduced capacity because fares must rise to cover costs and the only way to support the increased fares is to reduce capacity.

Note that the cuts in most capacity outside of Japan are coming after the 2nd quarter.

There are people who constantly are concerned about DL's plans for MEM - but I will say the same thing about MEM as I have said about MEM. For years, people have predicted the demise of CVG as a hub. There is no consistent definition of what constitutes a hub and while we can all agree CVG is a much smaller operation for DL than it was years ago, DL's market share remains virtually identical to what it was 5 years ago.

DL has removed connecting capacity from CVG and will do the same w/ MEM which is a similarly sized hub. There is a limited geographic need for MEM as a hub - just as there was for DFW - but there is a cost to carrying extra capacity through MEM just to support a limited network/geographic need.

The fact that CVG has not seen a change in market share or revenue by DL and that no low cost carrier has entered the market speaks to the fact that DL has been able to manage capacity in the market via connections, not the local market. It is noteworthy that nearly every other network carrier has pulled down hubs and lost their market share and revenue in the process. DL intentionally closed DFW as a hub and couched their moves as such; CVG has never "closed" as a hub.

I believe that DL will use MEM as "flexible hub capacity" and will remove connecting capacity as necessary but will continue to retain local market share and revenue in MEM.

As for Japan, DL is by far the largest carrier between the US and Japan with nearly 1/3 of the revenue and seats - but also has the ability to downgauge and reduce capacity through reduced frequencies in some markets such as HNL which have multiple frequencies.

It should also be remembered that JAL is still very much in the midst of their restructuring and it is very possible that the latest crisis in Japan may severely impact their ability to continue their restructuring. As the largest transpacific carrier from Japan, DL obviously stands to pick up traffic should JAL - and its partner AA - not be able to manage the crisis w/o larger capacity reductions in key markets.

The JP Morgan presentation shows that the transatlantic market is the only one where DL is not seeing 2Q revenue to keep up with increased costs, making it likely that there will be significant cuts in the TATL operation after the summer. Given that DL and AF/KL/AZ operate a lot of duplicated capacity in many markets so there is the potential to reduce frequencies and retain DL/AF/KL/AZ's basic network footprint.