Wednesday, June 04, 2008

United Slashing Capacity and Fleet; Buh-Bye, Ted

The march to a smaller, less reliable national air-transportation system picked up its pace today as United Airlines announced a sweeping series of reductions in its fleet, capacity and service routes. United also said it was killing its boutique product, Ted, an airline-within-an-airline that never quite took off.

United emerged from bankruptcy in early 2006 calling itself a "smaller, more efficient" airline, and offering a five-year business plan that projected the price of oil at an average of $50 a barrel -- at a time when oil was already trading at over $55 a barrel.

Among the cutbacks announced today by United:

---Pulling 100 airplanes -- 94 Boeing 737s and six 747s -- from its fleet of about 460. (United had previously announced that it would retire 30 of its 737s.) About 80 of those planes will be out of service this year, and the rest next year.

---Reducing domestic seats in the fourth quarter by 14 percent over the fourth quarter of 2007, and further reducing capacity in 2009.

---Eliminating Ted, which has a fleet of 56 Airbus A320s that are included in the overall United fleet figure. Those A320s will be redeployed as mainline United aircraft.

United's hapless CEO, Glenn Tilton, said that the cutbacks were intended to "leverage capacity discipline" and "develop new revenue streams."

Tilton did not elaborate on what he imagined those "new revenue streams" might be, but the major U.S. airlines have been betting the house on international routes, on the assumption that international flying will remain profitable and demand will hold up.

Here's the full text of United's statement today.

United was spurned repeatedly by competitors this year in its attempts to find a merger partner.

Two things to watch closely at United:

---1. Most of those planes United plans to pull out of service are leased, not owned. United says it is trying to negotiate a deal with its leasing companies. Remember, the payment on a leased airplane comes due each month whether you're flying it or not. (Of the total 460 aircraft in its mainline fleet as of Jan. 1, 205 were leased outright. Another 142 of the owned aircraft were listed as "encumbered." The vast majority of the older 737s are leased.)

---2. United's very close financial relationship with Chase bank, which props up its frequent flier program with its affinity credit cards by buying huge volumes of United miles to offer customers. Chase certainly is giving some thought to its exposure through that United link.

Meanwhile, as I have been saying all year, prepare for a significantly shrunken domestic air travel system that will significantly impact business and leisure travel, and the $750 billion domestic travel industry, for a very, very long time.


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