Airlines offer lightest fall schedules since 2001

updated 12:17 p.m. ET Sept. 14, 2009

DALLAS - The U.S. airline industry is shrinking to a size not seen since the months after the 2001 terror attacks.

The airlines have been trimming flights for the past two years, matching the falling demand for air travel. Additional capacity cuts are under way at American, the nation's second-largest carrier, and at No. 3 United.

It could get worse.

Most big airlines depend heavily on a relatively small chunk of passengers who pay the highest fares, "and that's generally business travelers," says Robert Mann, an aviation consultant in Port Washington, N.Y. "If business travel doesn't rebound, we're going to see further (capacity) cuts."

Less capacity means consumers will be left with fewer flights to choose from and planes will be crowded. Fewer seats normally means higher fares but that might not happen this time unless the economy begins a true recovery and passenger traffic picks up.

Airlines measure capacity in "seat miles," the number of miles flown multiplied by the number of seats on the planes. Capacity is crucial in the airline industry in the same way that inventories matter to car dealers and retailers. Too much capacity, and airlines have to cut prices, just as a department store stuck with too many suits and dresses will hold a fire sale. Airlines cut capacity by reducing the number of flights or using smaller planes that carry fewer passengers.

A look at airline capacity cuts Most major U.S. airlines plan to offer fewer flights this fall than they did a year ago as they adjust to weak demand. Here's a look at recent announcements from the carriers, who are listed in descending order of size based on capacity in August. The figures include both "mainline" and regional affiliates for each company. Passenger-carrying capacity is measured in "available seat miles" or ASMs — miles flown times seats on the planes. A 150-seat jet flying 100 miles (160 kilometers) equals 15,000 available seat miles. _ Delta Air Lines Inc. (21.6 billion ASMs in August, down 3.2 percent from August 2008): Said in July that third-quarter capacity would be 4 percent to 5 percent less than a year earlier, with deeper cuts in international flying than domestic routes. Mainline capacity on Delta will be lower by between 5 percent and 7 percent. _ American Airlines parent AMR Corp. (14.1 billion ASMs, down 9.2 percent): Said in July that third-quarter capacity would be 8.5 percent less than a year earlier, with the cuts 10.5 percent on domestic routes. _ United parent UAL Corp. (12.8 billion ASMs, down 6.2 percent): United says it will cut international capacity an additional 7 percent in the last four months of this year. The company had previously said mainline capacity — excluding regional affiliates — would fall by between 9 percent and 10 percent for the year. _ Continental Airlines Inc. (10.2 billion ASMs, down 6 percent): Estimates third-quarter capacity will be down 5.1 percent from a year ago, with deeper cuts on domestic routes. Mainline capacity will shrink 4.7 percent. _ Southwest Airlines Co. (8.3 billion ASMs, down 6.1 percent): Said in July that capacity for the full year would be 5 percent to 6 percent lower than 2008. The decline is expected to be 6 percent in the third quarter, 8 percent in the fourth compared to the same quarters in 2008. _ US Airways Group Inc. (6.7 billion ASMs, down 3.9 percent): For all of 2009, capacity will be down between 4 percent and 6 percent compared to 2008. _ JetBlue Airways Corp. (3 billion ASMs, up 0.6 percent): In contrast to bigger carriers, expects an increase in third-quarter capacity of between 1 percent and 3 percent from a year earlier. Fourth-quarter capacity is expected to be up between 3 percent and 5 percent over a year earlier. Source: Company officials, press releases

The Air Transport Association, the trade group for big U.S. airlines, estimates that carriers will offer fewer than 12.5 billion seat miles in the U.S. in the fourth quarter. That's not much more than the low of 12.1 billion late in 2001, when airlines were reeling from the Sept. 11 terror attacks, and it's down 13 percent from the fourth quarter of 2000.

After such a steep decline in demand, airline executives and analysts are looking eagerly for any signs of improvement. About the best they can say is that things aren't getting much worse. Airline executives say business traffic is a bit better than it was in the spring but still far behind last year's pace.

David Swierenga, former chief economist for the Air Transport Association and now an airline consultant in Texas, said the decline in demands slows with each passing month.

"The economy has bottomed and is beginning to turn around. Carriers will sit tight and go with the (capacity) cuts they've already made," he says.

Hunter Keay, an analyst for Stifel Nicolaus & Co., also doesn't expect dramatic cuts beyond those already announced. If airlines cut more capacity, he says, it will be on international routes favored by business travelers.

Eventually the economy will recover and airlines will consider adding back service. In past recoveries, airlines added capacity quickly as they scrambled for market share. That created a glut of seats, leading to fare wars and more financial problems.

Aviation consultant Mann said that's because airlines are hooked on growth, which helps them spread out fixed costs.

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"They always want to be in a growth mode," he says. "The problem is, you can be in a profitless growth mode too."

Darryl Jenkins, an airline consultant in Virginia, says this recovery will be different because the big carriers have been chastened by overly aggressive growth, high fuel prices and the recession. They've cut costs and don't want to undo those efforts by rushing to add back capacity.

This summer the airlines were busy, but weak fall bookings led them to offer deeply discounted fares to fill seats normally taken by business travelers. Southwest ran a sale with some seats as cheap as $30 each way on some routes.

Rick Seaney, the CEO of FareCompare.com, thinks the best of the fall sales are over. With airlines cutting capacity, and having sold many fall seats during the recent promotions, planes will be crowded.

"I can't imagine we'll see anything but firm pricing," Seaney said. "There are still some $99 coast-to-coast deals occasionally, but it's much more random."

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During the recession, low-fare airlines such as JetBlue, AirTran and Southwest have done better than their bigger rivals. The discounters set the prices on many routes, and the network carriers generally match them.

Even Southwest, however, is shrinking about 6 percent this year, and has announced a slightly scaled-back schedule for early 2010.

Bill Owen, Southwest's chief scheduler, says the airline has been trimming unprofitable routes, but "If it's full of full-fare business travelers, we're not about to cut that flight."

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JetBlue is bucking the industrywide contraction and will add capacity in the second half of the year. The New York-based airline caters to U.S. leisure travelers and has avoided the meltdown in international business travel. It picks targets for growth carefully — it's expanding in the Caribbean while shrinking on cross-country U.S. routes.

In setting capacity, JetBlue of course studies its own traffic but also keeps an eye on what competitors are doing. Robin Hayes, JetBlue's chief commercial officer, insists that the airline doesn't try to forecast the economy.

"These are plans we put in place back in the spring," he says of the expansion now taking place. "We take a long-term view, and we don't try to guess when the recession will end."

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