Airlines Scale Back, Slowly

In truth, nobody knows how far oil prices will go to hit capacity.
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The airline industry is scaling back in the face of skyrocketing fuel costs, but the process will be gradual and uncertain, unlike the sudden retreat that followed the terrorist attacks on Sept. 11, 2001.

Conventional wisdom says higher oil prices are forcing a structural change that will vastly reduce service and force a mobile country to become far less so.

But in truth, nobody knows. In fact, in its annual aviation market forecast it released two weeks ago,

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assumed that over time, oil prices will stabilize at $70 to $80 a barrel, closer to the cost of production -- and to the expected prices for alternative fuels.

In the meantime, airlines are paring flights. Domestic capacity is expected to decline 5% in the third quarter, 8.6% in the fourth quarter and 8.1% in the first quarter, according to current schedule plans reviewed by the Air Transport Association. The declines could increase if carriers pick up the pace.

By contrast, in October 2001, domestic capacity on U.S. carriers dropped 16.6%, partially reflecting cutbacks at Washington Reagan National Airport, says ATA. Capacity was then gradually restored: It was down 15.5% in December 2001 and 10.5% in March 2002.

After Sept. 11, "there was a sudden demand slowdown," says ATA economist John Heimlich. "We were trying to avoid flying empty." Not until 2004 did capacity return to 9/11 levels, he notes.

This time, Heimlich says, "It is a matter of incrementally adjusting the schedule over a longer time period. This is not a one-time demand shock. It is a massive structural change in our cost of doing business."

Boeing forecast that oil prices will "be high and volatile for the near future," Randy Tinseth, vice president for marketing at Boeing Commercial Aircraft. "Then we expect supply and demand to align" at the $70 to $80 a barrel.

If oil prices remain at current levels or higher, economic growth could slow, hurting aircraft orders, said Tinseth, who noted the $70 to $80 oil price estimates were prepared several months ago.

But, he added: "Three years ago, people (wrote) that when oil hits $50 a barrel our industry can't survive. Airlines have managed this surge quite well. They've been able to manage revenues, to manage nonfuel costs quite well and to remain profitable the last three years."

With fares generally lower than in 2001, airlines have room to raise fares without destroying demand, he said.

To be sure, schedule changes are underway. For instance,

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American Airlines will cut domestic capacity 11% to 12%. That means San Juan, Puerto Rico will have 35 daily departures instead of 55, as American shifts its Caribbean focus to Miami. There, daily departures will increase by seven to 258, including a 10th daily Dallas-Miami flight.

In the future, medium-sized cities will have access to fewer hubs, but few, if any, will lose hub access altogether. For instance, Lansing, Mich., and Toledo, Ohio, will lose Atlanta, because that regional jet service is no longer profitable for

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. Toledo also will lose Cleveland service, and will be left with Detroit and Chicago.

In general, "The future will look very much like today," says aviation consultant Mike Boyd. "Access to various places will drop off, there will be a diminution of the options, but it's not as if you will see New England lose all of its air service."

Harrisburg, Pa., wins and loses. American service to New York's La Guardia Airport will end, but

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will add four daily flights to Newark, N.J., on 37-seat aircraft. The new service is "a nice surprise," says airport deputy director Scott Miller. "We were talking about it for years."

Harrisburg benefits from having the seventh-highest fares in the country and a strong business community willing to pay them, Miller says, noting, "In this environment, (high fares) are a good thing." And Continental sees demand in Harrisburg for international travel from Newark, says spokeswoman Julie King.

At its Cleveland hub, Continental will scale back by 13.3%, cutting service to 24 cities. That is disappointing because hopes blossomed last September after Continental announced it would grow hub capacity by 40% over two years.

Still, it's not quite as bad as it looks. Airport marketing chief Todd Payne calculates capacity in Cleveland will fall 9.4% in the third quarter. "I was thinking it might be worse," he says. One positive: No. 2 carrier

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plans no cuts.

On the international front, Cleveland's outlook is unclear. The city has seasonal London and Paris service, which may or may not return. But with Continental planning to join Star Alliance, Lufthansa's Frankfurt hub seems within range. Payne won't comment specifically. "It would make sense (but) I want to be discreet," he says.