Our troubled economy

Capacity and job cuts coming to Delta and NWA

  • Article by: LIZ FEDOR , Star Tribune
  • Updated: December 3, 2008 - 11:37 AM

Growth in international travel fueled Delta Air Lines' recovery after bankruptcy. But foreign flying will not be a magic elixir in 2009 as Delta flies into a worldwide recession.

Delta, which acquired Northwest Airlines this fall, announced Tuesday that it will cut 3 to 5 percent of its international capacity next year as well as 8 to 10 percent of the seats on domestic routes.

"This action comes as a result of the global recession and weaker demand for air travel," Delta CEO Richard Anderson and Northwest CEO Ed Bastian said in a Tuesday memo to employees.

The magnitude of the flying cuts will trigger job cuts, but the two airlines didn't release any estimates. The executives said they will offer voluntary programs to reduce jobs within the combined workforce of 75,000 people.

Delta, now the world's largest airline, has been expanding rapidly overseas. But international flights are not immune to the "fairly significant drop off in demand" that Bastian said Delta began to see across its network in October.

Steve Loucks, of Eden Prairie-based Travel Acquisitions Group, said that business and leisure bookings on U.S. carriers may be off 10 to 20 percent next year compared with 2007 -- when the airline industry was rebounding.

Loucks, a vice president, said that his company has travel agents at about 1,700 locations and employees started to see bookings decline in September and October.

"That's essentially when the wheels came off the economy," Loucks said. He expects leisure and business travelers to take a conservative approach to spending on flights in 2009.

However, he added, "For those people who have the means, this is actually an excellent time to travel." He recently returned from a trip to London, which he described as "dramatically more affordable than it was just six months ago." In that time frame, he said, the cost of a British pound dropped from $2.05 to $1.50 because the dollar's value has strengthened.

'Pockets of growth'

Although Delta will shrink its overall international capacity in 2009, Bastian told Wall Street analysts Tuesday that Delta still will capitalize on "pockets of growth." For example, the merger of the two carriers will now allow Delta to link its passengers in its Atlanta and New York hubs to Northwest's key routes in Asia.

But Anderson, who stresses the credo that speed is the "difference between success and failure," said in his memo that Delta will continue to respond quickly to changes in domestic and international demand. He told employees that Delta's system capacity will be down 6 to 8 percent next year.

Earlier this year, Delta slashed its domestic capacity and cut more than 4,100 jobs through early retirements and voluntary severance packages. Northwest cut about 2,500 jobs to reduce its costs when it also decided to contract its domestic operations.

Kevin Griffin, president of the Northwest flight attendants union, said Tuesday that about 700 attendants took voluntary leaves this year, which allowed the employees to keep their health insurance. But he said that he hadn't been informed what kind of job cuts the company wants this time around.

Passengers will find the downsizing to be most pronounced in the domestic market. Bastian, who's also Delta's president, said that domestic capacity on Delta will be 20 percent smaller in 2009 than it was just two years earlier.

Don't expect big fare cuts

Despite weaker demand in 2009, airline expert Bill Swelbar said, "I don't anticipate big fare cuts."

Swelbar, who is based at the Massachusetts Institute of Technology, said that in 2003, struggling airlines cut fares to try to grab market share.

But in this downturn, he envisions carriers keeping fares up and attempting to closely match their seat capacity with market demand. The lower price of fuel will help Delta and some other airlines be profitable in 2009, Swelbar said. He added that some fuel surcharges have been eliminated, but many base fares have remained in place.

Bastian said Delta's fuel bill could fall by $5 billion in 2009 if oil averages about $50 a barrel, offsetting the erosion in revenue caused by the recession.

Bastian told analysts that the integration of Delta and Northwest is "fully on track," and he projected that Delta will secure a single operating certificate around the end of 2009. In addition, Delta will focus on resolving labor representation issues next year.

Michael Linenberg, a Merrill Lynch analyst, said in a recent report that the big airlines are taking a "disciplined approach" in their quest to match capacity and demand.

"The old adage that suggested it was impossible for an airline to shrink to profitability should be discarded," Linenberg wrote.

The International Air Transport Association recently reported that a "sharp fall in business travel coincided with a steep decline in the confidence of manufacturing businesses in Europe, Japan and the U.S."

In addition, Continental Airlines reported Monday that its passenger traffic declines in November outpaced its capacity cuts. Continental had reduced its mainline capacity by 7.8 percent last month, compared with a year earlier. But passenger traffic on that smaller base dropped by 10.7 percent.

Based on those numbers, Swelbar expects a "significant deterioration" in bookings for first class and business class tickets in the coming months. He added that Delta's reductions show "we are on the precipice of another wave of industry capacity cuts."

Liz Fedor • 612-673-7709

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