Wednesday, April 23, 2008

Over There: The Airlines' Retreat from Domestic Flying ... Delta and Northwest: $10+ Billion in 'Losses'?

Domestic airline service is being severely reduced by major airlines. We all need to look harder at the numbers as capacity is shrunk and smaller planes -- not just regional jets, but also Boeing 737s and Airbus A319s and A320s and other older narrowbodies, are being cut from fleets and parked in the desert.

Delta Air Lines today reported an amazing $6.4 billion loss for the first quarter of this year. And the airline Delta has made a deal to buy, Northwest, today reported a huge loss, $4.1 billion.

Turns out they didn't really lose anywhere near that much money, though. Let me get out my reading specs here. Delta's actual loss for the quarter appears to have been $274 million, and Northwest's appears to have been $191 million. That's still a lot of money on my block.

But the two airlines came up with that combined figure of over $10 billion in "losses," which looks ever so much nicer on paper for the regulators in Washington to publicly justify approval of a "merger" that they were already going to approve anyway.

Here's what they did. In identical language, Delta and Northwest said they took what they called "non-cash goodwill-impairment" charges against earnings. Those charges were $6.1 billion and $3.9 billion respectively for the quarter. This additional alleged lost dough is accounted for by the airlines' estimates of the decline in their market capitalization caused by oil prices, coupled with a bookkeeping thing that has to do with re-valuing the companies from what they were presumed to have been worth after prior bankruptcies to what they are presumed to be worth now.

But one thing is clear, major U.S. airlines are accelerating their retreat from serving domestic routes in favor of serving more international routes.

Some relevant statements from Delta's earnings report:

---"Delta now expects system capacity for the second half of 2008 to be down 0-2% compared to 2007, with domestic capacity down 9-11 %" (italics mine)

--"As a result of the capacity reduction, the company is removing 15-20 mainline and 60-70 regional-jet aircraft from its operations by the end of 2008. Delta is continuing to evaluate the fuel and demand environment and will make proactive changes quickly if economic conditions warrant."

---"Delta's international expansion has contributed significantly to passenger revenue growth, as the airline has launched nearly 90 new international routes since the summer of 2005 ... Delta has grown the percentage of its capacity operating in international markets from 25% in the March 2006 quarter to 33% in the March 2008 quarter. Delta expects more than 40% of capacity to be deployed in international markets by summer 2008."

Then there are these excerpts from Northwest's earnings report:

---"In September, after peak summer travel concludes, Northwest will reduce its scheduled domestic system capacity by approximately five percent versus the 2008 business plan. This reduction will entail the removal from service of 15 to 20 additional aircraft."

--- " For domestic routes, Northwest has participated in numerous attempts by various carriers to increase fares to reflect rising fuel costs, although most have been rolled back because some airlines failed to match."

---"Northwest attempted to increase the minimum stay requirements to create better segmentation between business and leisure travelers. Many have been pulled because airlines failed to match."

By the way (my comments follow):

1. Airfare experts like Tom Parsons and Rick Seaney dispute airlines' contentions that "most" fare-hike increases have been rolled back this year because some competitors failed to match. In fact, the major airlines have successfully raised fares (whether through filed fare increases or so-called fare fuel surcharges) on nearly a dozen successive occasions this year -- in concert.

2. Northwest did roll back some "minimum stay requirements" two weeks ago. These were attempts to add new restrictions on nonrefundable fares to make them less attractive to business travelers by requiring extra days on the road, including Saturday night stays. However, United Airlines has now added draconian Saturday night stay restrictions on all discounted (that is, nonrefundable) fares in every market in which it has competition -- which is 65 percent of United's markets. Now that United took that bold step -- and didn't even get called for it by most of the media -- other airlines are expected to follow.

The dread Saturday night stay restriction has risen from the dead.


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