Winging It: Airlines react to global pressures

Southwest Airlines chairman Gary Kelly tried to flatter me last week during the company's quarterly conference call with analysts and the media by saying it was my idea for the carrier to start nonstop flights between Philadelphia and Boston.

I'm happy to take credit for such a logical and lucrative extension of the airline's route network.

But Kelly was joking (I hope) because the credit really goes to you, the customer, for pleading with Southwest for relief from the high fares that other airlines were charging on the Philadelphia-Boston route. All I did was hound Southwest officials for nearly a year, asking when it would enter a market we all knew it would someday.

Jocularity aside, Kelly was responding seriously to a question I asked: Why will Southwest, even with the addition of the Boston service that starts next month, be operating 22 percent fewer flights from Philadelphia in the fall than it did two years ago?

Southwest's addition of Boston and its big cuts elsewhere were undertaken for the same reasons all the major airlines have sharply reduced their total capacity, or the number of seats for sale, and why some carriers are so eager to merge with competitors. The airlines have had to focus solely on routes where they make money.

Over the last two years, the travel business and airlines in particular have endured one misfortune after another, taking a pounding more severe even than 9/11 delivered.

The soaring fuel prices of 2008 were followed by the worst economic crisis since the 1930s. With fewer customers, especially business travelers, fare revenue dropped last year by 5 percent to 10 percent for most airlines.

They believe they had no choice but to try to raise more revenue by charging fees for numerous services and amenities once included in fares.

The winter snowstorms added more misery for airline customers and employees at the same time oil prices began climbing again.

The damage from the combination of factors, and the airlines' response to them, was clear when they began releasing their first-quarter earnings. AirTran, American, Continental, and Delta reported losses; Southwest had only a meager profit.

Then, wouldn't you know it, a volcano erupts in Iceland, halting North Atlantic flights for nearly a week, costing the industry an estimated $2 billion in lost revenue and added expense in the second quarter. European airlines suffered far more than U.S. carriers, but the industry's losses here still topped $100 million.

The airlines say they believe - and I agree - that they have had no choice but to shrink their route networks, trimming those losing money and concentrating on places where they can make the most.

The process started in earnest last year and continued into 2010, resulting in the larger carriers' having 8 percent to 10 percent fewer available seats for sale at the end of 2009 than they did a year before.

Combined with cuts they started making in late 2008, and what's taking place this year, some carriers could be flying 20 percent fewer seats than they were two years ago.

Philadelphia has been hit by the flight reductions the hardest of any city Southwest serves, according to a report last month from Hudson Securities analyst Dan McKenzie. From 71 daily flights in October 2008, Southwest will be down to 55 in the fall, including eight round-trips a day between Philadelphia and Boston.

Over the last year, Southwest has eliminated nonstop flights from Philadelphia to three cities and reduced nonstops to others. Smaller cuts have been made on routes to other cities, most of them in the West, freeing up planes to serve places Southwest started flying to more recently, including Boston, Denver, Minneapolis/St. Paul, and Milwaukee.

At the same time, Philadelphia-area travelers haven't suffered the loss of a great deal of other major-airline service, and have actually gained a little from US Airways.

By pushing more flights through Philadelphia and its other hubs, US Airways has a handful more flights here than it did a few years ago, which no doubt influenced Southwest to cut back.

Reducing capacity even more is the main goal of airlines that are talking merger, including Continental with United, or those, such as US Airways, that would love to find a merger partner.

Consolidation, of course, also has a distinct downside, as anyone shopping for air travel recently knows. A gradual recovery in traffic as the economy improves, combined with the capacity cuts, means fares have increased sharply this year over last year's bargains.

Further industry consolidation will mean more of the same.

Kelly defended the Southwest schedule reductions I asked him about, noting that "basic supply and demand" required the cuts in Philadelphia and elsewhere if the airline was going to cover its operating costs.

From Southwest's point of view, it has found the right balance between its supply of seats for sale and fares customers are willing to pay.

Southwest's "revenue performance in Philadelphia is outstanding, so the schedule changes we've made have worked in a spectacular fashion," Kelly said.

Perhaps that means Southwest will look for other routes from Philadelphia where its entry would slash fares by as much as 80 percent, as it did when my hounding about Boston paid off.