# Service Cuts in the U.S. Airline Industry What have been the factors at play?
William S. Swelbar Executive Vice President2 

# Consolidation is but one factor at work impacting the route service map

Source: InterVISTAS analysis of Innovata schedule data via Diio Mi3 

## We are now in our fifth straight year of domestic capacity discipline

-20% -15% -10% -5% 0% 5% 10%

2005 2006 2007 2008 2009 2010 2011 2012 2013 2014
Year - over - Year % change in available domestic seats AA DL + NW UA + CO US + HP WN + FL



### Pre - recession Rationalization Capacity Discipline

Source: InterVISTAS analysis of Innovata schedule data via Diio Mi4 

# What are r ationalization and capacity d iscipline?

• Rationalization (2007
- 2009): an active reduction of available seat capacity as a result of macroeconomic shocks to the airline industry and a “new normal” of higher 

## fuel prices.

• Capacity discipline (2010

– present): a restriction of seat capacity growth by network carriers (and Southwest) even as passenger enplanements have continued to increase

.

• “[Yield growth between 2007 - 2012] would have been impossible without capacity discipline.”

– John Gebo , SVP Financial Planning, United Airlines, August 20135 

## In the past y ear, capacity d iscipline h as r emained the status q uo

 Airlines continued to cut domestic flights by 2.4% from 2013
- 2014.

7.6 7.7 7.8 7.9 8 8.1 

### 8.2 8.3 8.4 8.5 8.6



### 2009 2010 2011 2012 2013 2014 Millions of Scheduled Domestic Flights

- 2.4%

Source: Innovata schedule data via Diio Mi6 

# Air service in the U.S. faces significant challenges

In the wing oil in excess of $100 per barrel

40,000 cycle decision

Prevalence of low/ultra low cost carriers in primary catchment areas Pilot shortage

surely to impact regional sector of the business

Flight Time/Duty Time regulations causes staffing challenges Capacity discipline at major carriers has reduced frequencies and seats Smallest new production aircraft likely to be at least 100 seats No 50 seat and

less replacement aircraft in the pipeline



## Government Induced Economic Operational

Strategic7 

## Small airports continue to be the most affected by airline capacity rationalization and capacity discipline

 Smaller airports saw a disproportionate share of the cuts in flights and available seats as a result of capacity discipline.

0 1 2 

### 3 4 5 6 7 8 9 Millions of Scheduled Domestic Flights

Non-Hub Small Hub Medium Hub Large Hub 

## % change in domestic flights

by hub type Airport Type % change in

domestic flights (2007 - 2014) Large Hub
- 10.1% Medium Hub
- 30.0% Small Hub
- 25.1% Non
- Hub
- 21.4% All Smaller Airports All Airports - 26.8%

- 17.4%

Source: Innovata schedule data via Diio Mi8 

# Despite cuts in service, U.S. airports r emain well
connected to the globe

-35% -30% -25% -20% -15% -10% -5% 0% Large Hub Medium Hub Small Hub Non-Hub



### % Changes in Scheduled Domestic Flights and Airport

Connectivity Quality Index Score

2007 - 2014 % Change Flights % Change Connectivity

Source: Innovata schedule data via Diio Mi and MIT Airport Connectivity Quality Index9 

# Domestic seat capacity has finally begun to grow 

# a long with the U.S. economy

— a return to normal?

 Capacity discipline has not been the natural state of the industry.

-8.0% -6.0% -4.0% -2.0% 0.0% 2.0% 4.0% 6.0%
1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014* % Change U.S. GDP % Change Domestic Seats

Source: BTS T
- 100 via Diio Mi, BEA, OECD (2014 US GDP Estimate)10 

# In today’s consolidated industry, there are more 

# questions than answers

 What will cause the legacy carriers to grow 

## frequencies?

 Where will that growth be?

 What will be the future of Southwest and jetBlue ? Can hybrid carriers find a sweet spot in the system?

 What is the future of Ultra Low Cost Carriers?



##  WILL THERE BE A REGIONAL INDUSTRY?

 Some airports will be winners, others will struggle11 

# I was asked to briefly mention labor 

# in the context of a consolidated industry

 Many more positives than negatives this time around

 Labor navigated the deal environment very nicely

 Industry not competing on labor costs



##  For the first time in history, average airline salary and benefits per full time equivalent is greater the $100,000



##  More stable industry provides employee with sense of security

 Modest growth in employment after years of deep 

## job cuts

 Profitable industry makes it more an employee market than an employer market as in the prior decade