Wednesday, July 22, 2020

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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