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Posts Tagged ‘Reduction’

Rising gas prices seems to be affecting every airline in the world. Ryanair, Irish airline based in Dublin, recently announced the following cost cutting initiatives –

  • Temporarily closing airport operations – Operations temporarily ended at Seven Airports – Basel, Budapest, Krakow, Palma, Rzeszow, Salzburg and Valencia.
  • Capacity Cuts at others – The airline is cutting down on 14% of its flights in/out of London’s Stansted Airport this winter from 1850 to 1590 a week. British Airport Authority (BAA), owner of the airport, is charging 15% higher for the year (there was a 100% increase last year). Stansted per passenger charges have gone from £5 to £12 over the last five years. Resulting from this cutback, Stansted will lose 90,000 passengers (worth £8m)
  • Grounding Airplanes – Ryanair is grounding 20 of its airplanes this summer

From Telegraph

Ryanair’s chief executive Michael O’Leary said: “These winter schedule cutbacks, which are significantly greater
than those of last winter, show just how damaging the BAA airport
monopoly has become to consumers and the best interests of London, UK
tourism and the economy generally.”

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Air Canada, Canada’s largest airline and flag carrier, plans to cut off capacity by 7% (2% of Canadian domestic flights and 13% of US trans-border flights). The airline is also going to lay off up to 2000 employees later this year. Rising fuel costs have been attributed as the main reason for the decision.

Jazz Air (Air Canada Jazz), Canadian regional airline operating feeder and commuter services for Air Canada, is also supposed to get affected with the announcement with up to 5% capacity reduction. Though, one airline analyst “doesn’t believe Air Canada can legally reduce the amount of hours
contracted with Jazz under a capacity purchase agreement that runs
until 2015.”
(from Canadian Press Article).

As a result of the announcement, Air Canada is supposed to park and retire the older wide body fleet of Boeing 767-200s and Airbus A330s to give way for Boeing 787s (to be received in 2012 with the current delay).

From Reuters UK

“Air Canada’s 274-seat A330s entered the fleet in 1999. It
has eight of them. The carrier has already said it will park
four older Boeing 767-200s while it rejuvenates its fleet.

The airline last month said it may receive its first 787 in
2012 instead of 2010, complicating its fleet planning. It will
push for compensation for the delay from Boeing.”


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After the failed merger attempt with United Airlines, US Airways has started its cost cutting initiatives. To offset the gas bill, they are planning/considering the following –

  • New/increased Passenger Fees
  • Charge for Soft Drinks (America West was the first airline to charge for a meal)
  • Charge $15 for first checked bag (started by American Airlines)
  • Capacity cuts
  • Potential Layoffs

Earlier US Airways had announced “no pretzels“, “charge for priority seating in coach” and “capacity cuts”.

From AZ Central

“”I think we’ll be aggressive on those fronts,” President Scott Kirby said of the industry’s move to a la carte pricing.”
“To break even, US Airways said it needs to get $650 to $700 per passenger from a combination of higher fares and fees. The airline is nowhere close to that figure.”

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China Airlines, flag carrier of the Republic of China on Taiwan, and EVA Airways, Taiwanese airline, are the latest to apply capacity cuts to offset the rising jet fuel costs. China Airlines is axing 100 passengers flights a month and EVA Air is supposed to cut 5% of its passenger flights from Sept 1 to Dec 1.

From Bloomberg

The airlines follow Qantas Airways Ltd., China Southern
Airlines Co. and other Asia-Pacific carriers in announcing cuts
after surcharges failed to cover surging jet-fuel costs. Higher
ticket prices have also helped damp travel demand, with Taiwanese
residents making 0.8 percent fewer flights overseas in the first
quarter than a year earlier.

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Let us consider flights between Los Angeles and New York.

Let us say we have –
First Case – No capacity cuts and low ticket price

  • 10 aircrafts with 100 seat each = 1000 seats available
  • Each seat is $100 (assuming one fare class for all)
  • There are 1000 passengers that are willing to pay the price and fly.
  • Airlines make100,000 – Cost of flying 10 aircrafts

Second Case – No capacity cuts and Higher ticket prices

  • 10 aircrafts with 100 seat each = 1000 seats available
  • Each seat is $150
  • Now we only have 700 passengers willing to pay the price
  • Airlines make105,000 – Cost of flying 10 aircrafts

Third Case – Capacity cuts and Higher ticket prices

  • 7 aircrafts with 100 seat each =700 seats available
  • Each seat is $150
  • Same 700 passengers willing to fly
  • Airlines make105,000 – Cost of flying 7 aircrafts

So, overall the airlines will fly fewer planes (hence no pay the cost of gas, workforce time, etc) and make same or more money (more is when the cost of flying a plane is more that a plane full of $100 a ticket passengers)

Disclaimer – I do admit that I have made it a little too simple and neglected the affect of different fare classes (which means you can buy a ticket from $100 to $1000), recession affect on passenger’s flying habits, etc.

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After American Airlines and United Airlines announcements on capacity cuts, Continental has come up with its own announcement.

From Bloomberg
Continental Airlines Inc. will cut
3,000 jobs and shrink its jet fleet by 18 percent, becoming the
fourth major U.S. carrier to slash payrolls and flights as
soaring fuel prices push the industry to its worst losses since
Sept. 11.”

How it affects a Passenger?
The reason for American Airlines to initiate the capacity cuts was a way of starting an initiative that is expected to follow by other carriers to decrease the overall network capacity. Since the carriers did follow suit, it means that there will be lesser seats available on the network to fly. This in turn means that the airlines can raise ticket prices even more without weakening their demand.

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United Air announced today that it will reduce its fleet by 100 planes by 2009 and cut 1400-1600 jobs. The cut has been attributed to rising fuel costs. This seems to be the first big cost cutting initiative that the airline has made after the failed merger talks with US Airways.

Earlier IATA had mentioned that they forecast a US$6.1 million loss for the global airline industry due to soaring fuel prices.

From CNN

United, owned by UAL Corp., said it was culling 94 B737s and six B747s from its fleet. The airline
is getting rid of its entire fleet of B737s, which it identified as its
“oldest and least fuel-efficient” planes.”

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