California Love? NK's SNA Announcement

Over the last few weeks, airline networks have become increasingly dynamic. As expected, airlines have continued to hack away at their future fall and winter schedules. At the same time, planners are returning previously operated routes back to their network and experimenting with new routes (American new routes, United to Florida, Delta MEM-IND). 

While a lot is going on, Spirit's new Orange County service really caught my eye. Why? There's a lot of history tied up in these three flights. Yesterday, Spirit announced they are placing Orange County (SNA) on their network with service to Oakland (2x) and Las Vegas (1x) starting November 17th. 

Since the Wright Brothers flew at Kitty Hawk, airlines have been fighting over the LA Basin. In the early 1990s, Southwest grew quite extensively in Intra-California as the original PSA was cut down after US Air acquired them. Fight after fight, Southwest ended up the king of the Intra-California market by way of their secondary market, Intra-California strategy. 

Southern California has always been one of those complex markets. The main airport, LAX, is insanely expensive and with continued (and often unnecessary) capital investment, cost per enplaned passenger has become outright insane with the Fitch credit rating stated cost per enplanement is expected to reach $30 per enplaned passenger. Even at $30 per enplanement, the airport still hasn't fixed their access/egress problems at the airport. 

It also should be pointed out the $30 per enplanement projection was prior to COVID suppressed enplanements and after Fitch raised their pre-COVID cost per enplanement forecast by $5 per enplanement from their forecast only one year earlier. I would expect LAX's unit costs to skyrocket further in today's environment. Remember, these costs are fees paid by the airline to the airport and do not include any of the airline's operational costs associated with their employees. 

In past economic downturns, airlines typically consolidated around LAX and abandoned the secondary Basin airports. This would typically make sense as alliances and more extensive operations allowed for enhanced connectivity. However, overall Basin Airport seat share for LAX topped out in 2016 and has been in a steady state of decline as carriers have started to fight over the secondary markets. 

Each of the secondary markets is unique. BUR, LGB, and SNA are all artificially constrained by noise caps. Burbank by gates, SNA by seat allocations, and LGB by slots. Ontario is the only secondary airport that is not limited to noise operations in any way. As airlines shifted away from LAX starting in 2016, two fights developed in the secondary airports: access to constrained airports and Alaska growing their California operation. 

Orange County, in particular, is an interesting airport. The airport, controlled by strict enplanement regulations, was left in the dust by most carriers during the last recession. Only Southwest continued to grow in the market until 2016 when their seat allocations were cut as other carriers requested access into the city. 

While Orange County has largely stayed flat in seats due to their seat allocations, the other constrained, secondary LA Basin airports started to see growth in beginning in 2016 as well. This was in part due to airlines shifting more capacity into the cities, as well as competitive pressures from Alaska. Long Beach, which peaked in their capacity in 2017, declined due to JetBlue's attempts to make the market work. ONT really deserves its own future post as it has transformed itself in a post-LAWA world. 

When we take a more in-depth look into secondary airport growth, we can see two trends Southwest cut a massive amount of their seats following the last recession and the 2015 forward growth came from Delta and Alaska as well as Southwest adding back the seats they previously cut. This really should not be a surprise if you've paid attention to the industry over the last couple of years. Both Southwest and Alaska competed heavily to be California's intra-state carrier. 

If you've made it this far, you're like asking yourself, "So, what does all this after to do with Spirt's new routes from SNA?" Well, one of the most essential things to route development is understanding who is actually making the route decisions. Some of the network planners at Spirit encompass both old AirTran/Southwest and Alaska folks. These network planners know how well Southwest performed within Intra-California. 

When we look at publically available DOT data, in 2016, before Intra-California was flooded with capacity, most Southwest's routes performed at or above system RASM curves. This helps explain why Alaska saw an opportunity to skim off the top in California. They knew Southwest overperformed in California and Virgin America had a large and loyal customer base. 

Even after all the capacity from Delta, Alaska, and Southwest, what route appears to perform better than all other Intra-California routes? You've guessed it, SNA-OAK. Spirit is hoping to skim off the top with their two new flights and expect to find California gold on the route. Do I think it will work? I give it a big maybe, but they have the best chance out of all carriers. 

When we take a look at the overall market share of Oakland, Southwest has a commanding lead of 73% of all passengers, with splitting the #2 and #3 Spirit and Alaska operating around 6-7% market share (Airlinedata.com). This is before American quit the market at the start of the virus. 

Now, I do want to be clear, I do not think the Spirit planners are targeting SWA more than any other carrier. All of the ULCC planners pull competitor's RASM curves and look for high passenger volume, over-index RASM performing markets. These high-performing, competitive markets are often ripe for passenger and fare stimulation. 

But, what is interesting to me is OAK-SNA will be Spirit's first secondary-to-secondary market route in California. Spirit skipped over other, larger Intra-Cal passenger and revenue markets to go after SNA to the Bay. SNA to the Bay produced a $20 premium compared to other Bay to Basin markets in 2019 (Source: The Hub by Airline Data Inc www.airlinedata.com).  

Unfortunately, we will never know how well the OAK-SNA market works for Spirit. The ULCC model relies heavily on "fees" (i.e., excise tax avoidance strategies), which are not reported on route level performance for their ancillary products. It is not possible to correctly prorate "passenger usage" fees, bag fees, etc., down to the leg level unless the DOT changes their reporting requirements. Don't hold your breath.  

I do think Spirit has a reasonable shot at making SNA-LAS work. From all of their California stations, Spirit operates at least one daily flight and often multiple daily flights to LAS. This appears to be beyond just an easy routing out of a crew base to make flight rotate easily. They are likely making some money here. Vegas is a bottomless pit of demand if you drop your fare low enough.... which Spirit is happy to do. 

Exactly what Spirit has in store for Oakland long term is difficult to know. Currently, October and November schedules show Spirit operating LAS and LAX multiple times daily, with less than daily service to Chicago and Houston. Currently, Houston and Chicago are scheduled to be discontinued in December, which I assume Orange County will take the place of. This would make the station balance around five daily departures, which Spirit promoted in their press release. 

Five flights do not feel like a long term solution for Spirit in Oakland, but we will have to wait and see. It would not surprise me to see Spirit turn more flights south out of Oakland once the economy starts to recover. 

Time to Close Some Cities

As we approach the ending of the first CARES Act funding, it is time to stiffen up our upper lip and realize it is time that airlines start closing cities. Last week, CNBC reported that American was looking at losing up to 30 small cities. Immediately afterward the article was published, I saw armchair quarterbacks from all areas of the social sphere immediately point to the convince of the timing of the leak. Yes, unions have taken an active lead with management support in advocating for another round of CARES funding. 

But let's cut the crap. Airlines are already stating they will be smaller coming out of the crisis than they were when the crisis began. How can airlines significantly reduce their network without cutting underperforming cities? Hint: they can't. As tough as it is to hear, it has to be said. 

But let's not kid ourselves either. Airlines have always made small cities the scapegoat for difficult capacity cuts. Why? First, larger cities are much more likely air service development teams that have built strong bonds with network planners. All things being equal, it is much easier to cut a city or route from an airport that you have no relationship with. Yes, you or your airport affairs peer will likely get screamed at by a director at a small airport for a few minutes, but then it is over. If you have a professional relationship with a team, it is much harder to make those calls. 

Second, scheduling into smaller cities is much more difficult. A planner can throw a single flight into Denver or Chicago and make something work. Small cities, however, you are much more limited in potential route and scheduling options. As a network carrier, you can fly a few frequencies into the nearest hub, but small cities will need to hit the inbound and outbound banks to perform. This means you might have an aircraft sitting in a small city for hours when it could be out flying. 

During the last recession, small airports really took it in the teeth with capacity. The smallest 25 percentile airports had their capacity reduced at a much larger proportion and much quicker than any other airport. Additionally, these airports were also last to see their capacity return. 

Not only were smaller airports more likely to lose their service, but 58 of the smallest 159 airports (bottom 25%) also lost all of their air service since the last recession. This is why you will see small airports become much more vocal and divisive, at least locally, about their air service offering. For these airports, it often is an airport versus the airline world. 

If you have read my blog long enough, you know very well I have not been 100% accurate on all my predictions. In July, I stated I expected travel demand to drop off significantly in the second week of August. I will happily eat crow served from this incorrect prediction (but still very cautious about September). Nominally, TSA passenger traffic has actually increased week-over-week in the second week of August. Exactly what is driving the increase, I am not sure. I'll start digging in when the TSA releases more airport-specific screening numbers soon. 

Even with passenger traffic (maybe) continuing to recover, capacity moves by airlines reek of desperation for new revenue streams that do not compete with their existing network. Let's take a quick look at United's new point-to-point markets. 

In 2019, United carried very few, if any, passengers within their newly announced markets. The Cleveland markets are a bit of an outlier, but United did recently drop these routes only to add them back as "new" in the November schedule. There is nothing new or inventive about United's new routes. They are adding capacity into large markets in hopes to pay for fuel and maybe a little bit more.  

This increasing desperation by airlines might be a boon for the passengers that are traveling, but it is also the same revenue destructive behavior that rushed airlines right into previous bankruptcies. But right now, airlines are not able to make completely rational decisions. 

Airlines are locked at a semi-previous state status-quo in terms of airports served and employment levels. Even with voluntary employment exits, airlines are still burning a massive amount of cash and are looking at other carriers' honeypots to steal from. 

According to Edward Russell from thepointsguys.com, 75,000 airline employees have been warned their positions could be eliminated. If you've been in the industry long enough, you should know better than assume this is some political game. Yes, many of these jobs may be saved, at least temporarily, with another round of CARES funding, but airlines will have to shed employees to reduce cash burn and start to deleverage themselves. Just this morning, Southwest reported they've issued nearly $19 billion in new debt since the beginning of the year. This will takes years to pay down even in the best of demand environments. 

Even in the unlikely event carriers breakeven with cash by the end of the year (I'm not sold), they still will have a rough January and February to deal with before generating cash to start paying down the government loans and corporate bonds that were issued over the last six months. For those looking to understand previously reported cash burn rates, CrankyFlier had a great write-up here.

With voluntary employee furloughs and layoffs in addition to the involuntary actions that are likely coming October 1, we now have to turn to other cost reductions, airport closures. 

Let's take one of American's smallest investment stations in 2019 as an example. Tyler, Texas is just 102 miles to the southeast of Dallas. In 2019, American operated on average four daily regional jets from DFW into the city. Just four daily flights flying 102 miles generated almost $12M in network revenue for the carrier. Put another way, American needed $4,000 in network revenue per flight to keep themselves interested in the market. 

As I've stated before, it is impossible to know if American was making money in the Tyler (or any) market. But if they were making money before, it is unlikely they are making money now. This puts American into a difficult position with airports such as Tyler. With no other legacy carrier operating in the city, there might be some ability to yield in the market. On the flip side, if they were to exit the city, it is likely some of the passengers would just drive to DFW or Love Field. Any cash burn from the city would largely be eliminated with the some potential to recapture some of the lost revenue. 

I do want to be clear, I am not saying American is leaving Tyler, I just want to use them as an example of the complicated decisions entering network planners minds. 

So where will airlines start to cut capacity? If you are worried about your airport consider the following two conditions as major red flags. If your airport ended up on the DOT service exception list, even if the airline was originally denied or pulled the request, consider your self warned. Melbourne, consider yourself forewarned. Finally, if you have another peer airport within close proximity and your airport has significantly less service than the other airport, there is a good chance you are on someone's list. 

Sorry, folks, unlike the past, I will not be generating my list of cities that are most likely to be impacted. The reasons are actually simple. City exits are extremely political (see Delta's attempt to close MLB). The last thing I want to do is stir up an unnecessary firestorm. Additionally, there are a lot of consultants out there that should be advising their airport of the current risk environment. They do not need free consulting work from me. 

Regardless of any additional rounds of funding from the government, airlines need to shed underperforming assets and costs. If we continue to keep completely unnecessary capacity flying, it will only hurt the industry in the long run. It is time for carriers to start making difficult decisions and clean up underperforming cities. After that, we will likely see a long period of stagnant growth from our large carriers as they reduce their debt and defer new capital expenses associated with new aircraft. This could set the stage for rapid growth for any new carriers if they can get off the ground. 

Networks Are Stabilizing: What About Cities?

The last five months (it's only been five months?) have been rough. Right now, we are currently in a cycle where legacies are rolling out massive cuts every couple of weeks. If you only read capacity change reports every couple of weeks, you would likely feel like the industry continues to spin in a downward spiral. While it often feels this way, I'm here to tell you airline networks are stabilizing. Yes, really. 

As an industry, network capacity has stabilized since July to around 14,000 average daily flights and 1.6M average daily seats. While this is nearly a 50% reduction in capacity, year-over-year, we are not seeing the continued decline in network capacity as we were seeing in March thru May, nor do we see a recovery that we saw in May thru July. Instead, we are stable at our 50% year-over-year decline. However, this stability is a hard pill for all of us to swallow with WARN notices spread across the industry. 

While I would expect some additional pruning of September capacity, I believe most of the legacy capacity was finalized over the weekend. If there are more substantial cuts coming, expect them from more point-to-point carriers such as B6, WN, and F9 as well as HA.

As networks have stabilized, legacy carriers have invested and often restructured their hubs. Since American's merger with US Airways, American has focused on building large, peaking banks rather than flatter rolling banks of the American-past. 

Let's take American's most bank dependent hub, Charlotte. Before the pandemic, American was running nine distinct banks within their CLT hub. Just two months later, American had gutted the structure to only four slightly smaller banks. American clearly positioned these banks within the core of the day as well. 

By July, seven of the banks had returned. Interestingly, these banks were largely restored to their March size, just fewer banks overall. As an example, the 9:30 departure bank peaks at 60 departures in both the March and July schedules. Finally, by September, the hub is still working with seven banks; however, American continues to adjust the bank sizes. The first two banks are slightly larger than their March compares, while there appears to be some horse-trading in the middle three banks. 

Delta, on the other hand, had historically used a blended, rolling bank within its Atlanta hub. Using March as an example, Delta only has a few peaks within its structure. Instead, there is more a continuous feed of flights throughout the day. However, by May, the rolling hub was gone, and Delta had switched the hub entirely to eight mini-peaked banks. Clearly, Delta was attempting to generate as many connections as possible for each flight. 

By July, each of the banks grew by at least ten additional flights with limited flights between each of the banks. This starts to change in the September schedule. In the September schedule, we can see Delta's willingness to grow outside of the peak bank structures starts to grow. 

While network planners are rebuilding banks, they are also examining how hubs are interacting with each other. Hopping back over to American's network, the makeup and proximity of CLT, DCA, and PHL to one another could create duplicate capacity on the network. As a planner, you are already competing with other carriers for scarce demand. You really do not want to be competing against yourself as well. 

When we examine American's leg passenger make up at CLT, DCA, and PHL, we quickly notice two things. One, from an absolute passenger count, CLT is massive compared to DCA and PHL. However, in terms of local passengers, all three hubs are roughly the same size. 

However, when we dig deeper, American is clearly treating each of these hubs independently. In September, DCA will only be operated at 29% of its last year's schedule. This compares CLT and PHL scheduled at 71% and 55% of their prior-year domestic trips, respectively. 

The significant DCA capacity decline is only possible thanks to FAA slot usage waivers that are currently extended through the end of October. Given the current level of passenger demand, I have to believe we will see the waiver extended at least thru the end of the year. With the September schedule, year-over-year, American will exit 21 markets and isolated their higher frequencies to American hubs, focus cities, and Portland, Maine. To be honest, I don't understand the last one. I suspect this might be an operational requirement, but it is difficult to know. 

When we take a look at the markets that American discontinued in September, we will quickly see two themes. Either American believes these markets can be recaptured, primarily via CLT or PHL, or American decided that the quality of the market demand is too low to warrant competing on these O&Ds. 

When we review both PHL and CLT, it is clear each of the cities offers distinct connecting patterns. When considering hub structure, PHL connects a lot of the Midwest and Mid-Atlantic to the Northeast and Europe (when it becomes available again...). PHL does overlap some with Northeast to Florida connectivity as well. 

CLT, on the other hand, offers a much larger breadth and depth of markets connecting the Midwest, Southeast, Florida, Mid-Atlantic, and the Northeast. This allows for robust connectivity and operational redundancy should it be needed. 

Interestingly, other than HPN, we do not see any domestic exits from CLT year-over-year. The reductions we do see are nearly entirely isolated to the number of banks planned this September vs. last September. 

This is likely a function of how American's network planners have structured the operation. Notice, CLT has limited Chicago and Dallas overflies. This again limits the amount of unnecessary redundancy within your own network, which would cause hubs to compete with themselves. 

While most hubs are starting to see capacity return, I do believe within the next month, barring an extension of the CARES Act, we will begin to see airlines remove spoke cities from their networks. If your city ended up on any of the carrier's DOT wish list, even if they are still operating there today, I would consider those cities the some of the first to be removed. 

Unfortunately, after that, we only need to go to our latest recession to see the standard targets, co-termed cities and small markets. In our next post (8/19), we will take a look at what airlines have historically dropped during network contractions. By then, it is very likely we will see Delta publish their revised October schedule, which is when CARES obligations expire and airlines can remove cities entirely from its networks. 

Delta's Cuts: Where's Everyone Else?

When Friday's schedule load was processed, it was clear airlines were starting to publish more realistic September schedules. Delta led the pack with the most capacity reduced week-over-week for September travel. In total, Delta removed 1,659 domestic flights per day or 36% of the week's September schedule. But as we discussed last week, what airlines had filed in September and beyond was a fantasy. 

We showed that before Delta's reduction, September was scheduled to be the highest number of expected seats since March 2020. Even as the industry showed some signs of recovering, for September seats to be higher than any month, especially all of the summer, would put us in the Twilight Zone. 

All of this surplus fall capacity is in a stalling recovery environment. As I predicted, we are starting to see TSA screenings flatten year-over-year. In the last three weeks, the seven-day moving average has stalled at -74% year-over-year. Unfortunately, if our forecast is correct, we may start to see a decline in screenings beginning around the second week of August and continue through September. 

  

Jumping back to Delta's schedule, the cuts should not catch anyone by surprise. The fall was and continues to be frothy. But Delta's cuts, as well as American's and United's are on a schedule. For August travel, Delta began their large cuts seven weeks before the start of the month, cutting domestic seats by 36% vs. what was filed the prior week. This is the same approach that Delta took with September, both in terms of timing and percentage seat decline. Further, Delta continued to adjust their seats downward another 12% between two and six weeks before the start of the month. I suspect we will continue to see this approach as Delta's revenue management analyzes booking trends.  

This raises the question, why have we not seen other large legacy carriers cut September similar to Delta? Well, its a week or two ahead of time before we would see those changes. Taking a look at American, American cut their August capacity in two waves: one at eight weeks out and another cut at four weeks out. If we take a look at September capacity, we see September's first, albeit a more significant reduction eight weeks prior to the month. It appears logical that we will see another round of cuts, not this Friday, but next Friday. The reductions could be loaded sooner due to American's earnings call is this Thursday. 

Interestingly, United follows a nearly mirrored pattern of American's capacity cuts at the system level. Like American, United started their first capacity cut at eight weeks out, with a much more aggressive cut at four weeks out. In United's earnings report, the carrier stated they expected capacity to be down 65% in the third quarter, so there is little reason to believe there will be a dramatic shift in United's September and October capacity patterns. 

Beyond the legacies, we are starting to see significant cuts at the smaller carriers. Over the weekend, Spirit cut 54% of the domestic capacity in September. This dramatic reduction is off-trend for Spirit and could raise red flags at the macro level. However, Spirit schedule is a prime example of worst-than wishful thinking and should have been removed quite some time ago. 

What do I mean? In the August schedule, Spirit waited until the absolute last minute to remove capacity from their domestic network. With only three weeks before the first August departure, Spirit removed 44% of their August flights. 

If other carriers are doing this, why am I singling out Spirit? American, Delta, and United have hub structures in place. While passengers might get displaced from their original flight, few will experience a significant change in their travel plans (i.e., nonstop to connecting). Spirit does not have the network structure to accommodate passengers into their original booked experience. Passengers booking Spirit to fly nonstop will likely find themselves connecting on Spirit (who doesn't have great connections) or being entirely canceled and refunded their booking, just three weeks before their flight. Either of these scenarios were completely unnecessary.

Spirit's schedule was never remotely realistic. While all carriers have bloated fall schedules (and they should all be publicly shamed for it), Spirit continues to publish a 17% increase in flights year-over-year for the fall. It has been evident since April or May that growth for the year was not in the deck of cards for anyone. Spirit had plenty of time to rebuild their network but failed to make the necessary modifications until the last minute and only for a month at a time. 

Finally, I want to take one quick look at another substantial capacity reduction, Alaska. In the latest schedule load, Alaska removed 38% of their September domestic seats. The cuts are spread throughout the system, hitting all major hubs (SEA, PDX, SFO, LAX, SAN, ANC). However, we can see Alaska starting to entrench around Seattle, with the main hub down only 26%. PDX and the California cities were down 40-50% in seats. 

Similar to Spirit, Alaska waited until the last minute to cut August. Unlike Spirit, however, Alaska has the depth (and now codeshares) to recover passengers much more with significantly less strain. Additionally, Alaska is pushing their cuts earlier into the booking curve.

 

As we progress closer to the fall, we will continue to see cuts from all carriers. And the numbers will likely be headline-grabbing, however, it is important to keep everything in context. Carriers are just now reducing their largely untouched fall and fourth quarter schedules. In terms of overall trends, capacity will likely be flat to up vs. summer capacity. 

As carriers start to work through the October schedule and beyond, the only outstanding question is which cities will stay on the network. Airlines that accepted the CARES Act funding can start dropping cities starting October 1. After that, I think it is anyone's guess if carriers start hacking off full appendages. 

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A couple of house keeping notes. Thank you for sticking with me even after my sabbatical. 

I want to make sure everyone is aware how to connect with me. First, in the top right corner of the page, you can submit your email address to have weekly post sent directly to you. If you sign up for the email list, you will receive a email confirmation where you will need to verify your email address. The list is only to deliver my weekly posts and you will not be hit up with marketing.

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One Way or Another, Expect More Capacity Cuts

In last week's post, we highlighted TSA screening data that hypothesized both a lopsided summer recovered and forecasted upcoming demand weaknesses for travel in August and September. Over the weekend, domestic carriers started to back off many of their recent capacity increases, as well as started reducing early fall capacity as well. 

While these capacity reductions, which we will discuss, look dire, it is important to remember that the fall capacity window still has a lot of fat to trim compared to the summer. What do I mean, well, if September were to fly today September 2020 would have 60% more seats flown vs. July 2020. Typically, September capacity decreases as summer travel wanes from a more leisure focus to more business or required travel.  Last year, the largest carriers flew 10% fewer seats in September compared to July. 

As we discussed last week, the summer recovery appears to be leisure-focused. Leisure dries up significantly starting in the first week of August and declines through September. So, with a lack of business-related bookings, there is little reason to expect significant growth in the fall.

 

On Tuesday, Delta had their first earnings call since everything came apart. In an interview on CNBC, Ed Bastian stated Delta sees similar trends. According to the interview, summer volumes are roughly 20-25% of average volume, mostly due to relatively good, but stalling, leisure demand. Business, on the other hand, is around 5%. It is unclear in the interview if he means business is 5% of total bookings or 5% of the previous year. 

In the last two weeks, airlines have started to decrease their capacity, but all of these cuts are targeting August through September. Even with these reductions, capacity does gradually increase from ~50% down year-over-year in early July, to 25-30% down year-over-year in early September.  After Labor Day, seats are flat to up, year-over-year. 

As we dig deeper into the August values, we notice that most of the network carriers are currently scheduled to fly with 40-50% fewer seats in August. Southwest is the outlier dragging the entire industry capacity up. Southwest is currently expected to be down *only* 10% in seats. Considering the continued delays from the MAX flying and general conservative nature of their leadership to product their balance sheet, this honestly surprises me. 

With generally all carriers stating demand has started to plateau, Southwest's off-trend capacity approach doesn't add up to me. While it would be possible that Southwest sees a higher traffic return than other carriers, I do not believe this to be the cause. When we isolated predominately Southwest airports (DAL, OAK, MDW, and HOU), TSA screened passengers are only recovered to -75% year-over-year. I cannot imagine being down 10% in seats for August is sustainable.  

 

But, compared to other carriers, Southwest might be completely stuck with this situation. For those that know the Southwest network well, it can be best described as a giant spaghetti monster. What do I mean? Southwest does not have hubs, nor are they exactly a point-to-point carrier either. This causes the carrier not to have hubs in which aircraft can be terminated without impacted multiple down-line flights. This is generally not as difficult at network carriers or nearly pure point-to-point carriers such as Allegiant. 

The picture above is 10 random Southwest planes operated on March 10, 2020. 

When the virus started to impact customer demand, all carriers were forced to make day-of cancellation decisions. This was expected, given the dramatic decline in customer demand. Southwest canceled over 50% of its scheduled flights throughout much of April 2020. While all carriers saw a ramp-up in day of cancellations as well; however, others were able to more immediately cut their scheduled flights while Southwest was more delayed until late April and May before they were able to enact sustained cuts. 

If Southwest has bet wrong on the August schedule, it would not surprise me to see a spike in day-of-cancellations throughout the month. 

But it is important to remember, too much capacity in the fall is not just a Southwest problem. All major carriers are running extremely hot with capacity immediately following Labor Day. With lagging demand, we should expect to see capacity cuts start rolling in soon. 

As these capacity are announced, which I believe we will hear updated guidance anytime now, it is essential to note that even substantial capacity reductions could still keep airlines larger than they were in June and July. Until then, we all wait uncomfortably together. 

Repost: Behind the Cuts: Examining Why JetBlue is Cutting Long Beach

Normally, I stay away from recycling my old material, but with JetBlue's announce they are closing down Long Beach, I feel it is important to remember, JetBlue did everything they could to save the city. The economics simply were not there. 

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In the early winter of 2017, a small group of us Southwest Airlines network planners were gathered in a conference room. We were given our marching orders. The 737 classic fleet was headed into retirement on September 29th, moved the 30th, and the MAX would join the fleet on October 1st. With the reduction in airframes, we were going to have to reduce frequencies and eliminate routes to keep the network operational with balancing commercial constraints. After months of debating, it was time to decide.

Cutting sucks. There’s a good chance you had to eat crow after defending the poor performance as you believed the route just needed to mature. But it was finally time. Due to aircraft constraints, pressure to get network performance up, or this route’s performance just dragged for too long without meaningful long term strategic value, today is execution day for this route. Regardless of the reason, someone is going to be pissed at your decision.

In my time as a planner, I heard it all:

• This is the most short-sighted decision ever made 
• I am going to have (name the ULCC) enter the city and they will take all your customers
• You do not understand the city/market. 
• You are lying
• Well, I'll be calling (name the Leader) and they will be reversing this decision

Once, I heard three of these in just one 20 minute meeting.

I bring this up not for sympathy, but for understanding. I was fortunate enough to have and still maintain great industry relationships. I bring this up as JetBlue's network planners are likely experiencing this exact same reaction both internally and externally with their decision to cut Long Beach. JetBlue employees are likely being displaced or their hours reduced and front line employees may be feeling left in the dark. However, JetBlue has been struggling in Long Beach since 2008 and are executing on their fourth attempt at a city recovery.

The reality is there was little JetBlue could do with Long Beach that would make commercial and financial sense. Its commercial teams were left with no great options. It all likelihood, network planners could have been handicapped by constraints to delay what many may believe as an inevitable outcome.

With that digression, let's dig deeper into JetBlue's history and ultimate decision to reduce its operation to just 15 daily flights.

In August 2001, JetBlue entered Long Beach with twice daily JFK service, which was quickly accelerated to three times daily. After JetBlue's initial launch, B6 rapidly built up its position at Long Beach in response to their initial success in the market. This continued until 2008 when they topped out on slots and performance.

Depth to Breadth 

While the initial service into Long Beach appears to have been pretty successful for JetBlue, the performance love affair was shortlived. The Great Recession took a healthy bite into JetBlue’s revenue and in 2008 Long Beach's unit revenue production turned negative. Of the 14 routes, 12 were performing below the system RASM curve.

To counter the declining performance, JetBlue had to change something with the Long Beach service. Over a few years, JetBlue slowly began to transform Long Beach's network. The carrier believed their path to system returns lay with more markets at a lower frequency. The planners began to reduce higher frequency markets like IAD and JFK for lower frequency markets like AUS, PDX, SEA, and SFO.

Seasonalization 

Even with the breadth approach, the network performance in Long Beach still dragged on the network. In 2011, Long Beach's unit revenue performance really took a turn for the worst. At this point, most routes were double-digit negative compared to JetBlue's RASM curve. The only routes that appear to be working were back to the East Coast. All other Long Beach markets really pulled on the JetBlue network.

Without immediate action, this level of revenue performance would become quickly unsustainable. In 2012, JetBlue began aggressively cutting off-peak flying. Typically, JetBlue would reduce its seasonal schedule by 5-10% off the peak. However, in 2012 thru 2014 the carrier reduced its off-peak schedule by 20% of peak schedules. This approach trimmed JetBlue's yearly departures by as much as 10%.

Save the Slots 

In 2014, the Basin began to heat up as carriers started to fight for limited airport space. All secondary airports in the Basin, excluding ONT, are constrained by some type of noise controls. Orange County and Long Beach have slots, while Burbank has gate caps. As Orange County and Burbank started to fill, carriers began to shift their attention to Long Beach's limited slots.

Appetite for Long Beach began in earnest in late 2015 when the airport announced it would lift the noise cap to allow nine more flights into the airport. Of the nine new slots, JetBlue received three, Southwest four, and Delta two. Later, Southwest would use JetBlue’s underutilized slots to fuel additional growth in the city.

As is often the case with JetBlue’s focus city, these competitive incursions initiated a response from JetBlue. In August 2016, JetBlue announced its plans to fully utilize all of its slots. This shot JetBlue's departure count from ~23 daily flights in 2016 to 35 flights in 2017.

Plowing this much capacity into subpar routes is one heck of a way to start a turbine with cash. During this period, most routes moved further down the revenue production ladder. Long Beach now saw a sea of red as most routes were producing 20-40% below the system RASM curve.

The opportunity cost associated with operating these routes was astronomical. If these flights were deployed to routes that produced system average returns, JetBlue would have seen roughly $80M in additional ticket revenue. This value excludes all ancillary fees.

Now, I want to be extremely clear. The graph above does not state JetBlue lost $80M in Long Beach during their slot utilization ramp-up. Rather, the graph is an opportunity cost for flying underperforming routes. No one can say exactly how much money JetBlue made or lost in Long Beach except JetBlue. Please see my cost tangent if you receive airline "profitability reports". But the graph above can be used to understand the direction and magnitude of JetBlue's performance.

Slot Saving is Expensive 

After what appears to be a massive drop in Long Beach performance, JetBlue tossed in the towel. Twice. Kinda. In September 2018, JetBlue reduced flights by 30% but would not return the slots back to the airport until months later. Interestingly, the carrier decided to only exit FLL and removed frequencies across a variety of underperforming markets rather than more significant market exits.

This is the one time I’ll fault JetBlue’s logic in this entire process. Long Beach was bleeding cash and the first round of reductions really did not feel in line with the city’s performance. The first round of cuts announced by JetBlue were focused on stopping the hemorrhaging, but not on truly getting the city healthy.

The reductions in capacity greatly increased the performance of the city in terms of year-over-year unit revenue production. However, year-over-year RASM growth is largely meaningless when JetBlue's 2018 route performance is factored in.

This is where we found JetBlue until last week. Most routes continued to underperform their system RASM curve. Intra-California routes to SMF and SJC were particularly terrible. This is in line with JetBlue’s market exits.

Will Cutting to Profitability Work? 

After all the aggressive protectionism then retreating, do I think JetBlue may finally be stable within Long Beach? I give it a big maybe.

When we examine JetBlue as a whole, rather than just focusing on Long Beach, after the latest rounds of cuts, while still underperforming the system, Long Beach could be in much better financial position than it has been in quite some time. The routes that remain are generally within the tolerances of acceptable unit revenue performance. Don't get me wrong, the remaining routes are not stellar, but the entire system cannot be above system averages. Averages don't work that way.

Another thing to keep in mind, following this round of cuts, Long Beach is unlikely to have the JetBlue’s worst-performing routes attached to it. If JetBlue is looking to harvest and redistribute aircraft within their network, it appears they would have a healthy selection of other poor performers to sift through first.

Finally, there has to be consideration given to the logistics of routing crews out of the Long Beach crew base. Further cuts would make it nearly impossible for JetBlue to efficiently move crews. The costs associated with dislocating LGB based crews are might be prohibitive given the production of the remaining routes compared to extremes such as shutting down a flight crew station.

It is still very possible that we may see a reallocation of flights between the remaining markets, but I honestly do not expect any more earthshattering moves at least in the near term.

The only wildcard for Long Beach is competition, but I would not expect immediate meaningful competitive growth. Kate Kuykendall, Long Beach's public affairs officer, stated the airport has not received an official notice from JetBlue regarding their intention to relinquish slots at the airport. The airport is well aware of the announced reductions, however, until JetBlue returns slots, the airport cannot start the process of reallocating them to other carriers.

According to the Long Beach airport, JetBlue has 24 permanent flight slots. These slots have minimum usage requirements which JetBlue will dip below during the 3Q2020. This could mean, without JetBlue voluntarily surrendering their slots, it may be the 4Q2020 or 1Q2021 before slots are reallocated from this flight reduction. If the 14.8 average daily flights are the baseline for JetBlue's new slot allocation, we should expect to see JetBlue be allocated 17-18 slots, which free 6-7 slots for competitors.

JetBlue's potential delay in relinquishing slots should not come as a surprise. When JetBlue reduced capacity in September 2018, the carrier did not return its unused slots until the spring of 2019. Further, in New York, I suspect there are a lot of hard feelings following increases in curfew fines, increases in slot utilization requirements, and the city walking away from the international terminal. I do not expect JetBlue to play along nicely with its slots.

By the time the JetBlue surrenders the slots and the airport executes on the allocation process, we could be looking at early 2021 before Long Beach sees carriers backfill in the airport. In the more near term, the airport is already in the process to allocate three new noise supplemental slots. This process should be completed in February.

According to CrankyFlier, three carriers remain interested in additional Long Beach slots: Delta; Hawaiian; and Southwest. Based on JetBlue's remaining network, I believe there is limited exposure that you can reasonably see these three carriers overlapping with JetBlue.

If Delta were wanting to increase pressure in SLC, they already have the opportunity with their last slot allocation which they sent to Vegas. On the Southwest network, a reasonable person could argue for additional Las Vegas flights or maybe a long shot at Austin service. Otherwise, I’d expect the new capacity to be allocated away from JetBlue’s Long Beach network by these carriers.

Barring Alaska jumping into the mix, which is possible, but not likely, SEA, PDX, and SFO are unlikely to see additional competitive pressures. With Alaska exiting Long Beach in 2015, I do not see a large possibility of them wanting to relaunch the city.

This should for the time being bring stability to JetBlue in Long Beach.