Sucheta Dalal :United Continental Ground Jets Lay Off Workers
Sucheta Dalal

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United, Continental Ground Jets, Lay Off Workers  

June 6, 2008

Consumers will face higher fares, fewer flights

United kills Ted, its low-fare carrier


 By Mark Huffman



June 5, 2008

United and Continental Airlines say they will ground fuel-guzzling jets, lay off employees and -- most critical to consumers -- cut domestic capacity before then end of the year. American announced drastic cutbacks last week, as legacy carriers face ruinous increases in the cost of fuel.


United said it will remove a total of 100 aircraft from its mainline fleet, including the 30 previously announced Boeing 737s, and reduce its mainline domestic capacity in the fourth quarter 2008 by 14 percent year over year. The company expects to retire all of its 94 B737s, provided it can work out terms with certain lessors, and six Boeing 747s.


Over the 2008 and 2009 period, cumulative mainline domestic capacity will be reduced between 17 percent and 18 percent and cumulative consolidated capacity between 9 percent and 10 percent.


With little fanfare, United will be eliminating Ted -- the low-fare, one-class carrier it introduced in hopes of competing with Southwest, jetBlue and other low-cost carriers. It will reconfigure Ted's 56 A320s to include United first class seats. The reconfiguration of the Ted aircraft will begin in spring 2009 and be completed by year-end 2009.


Continental said it plans to cut 3,000 jobs, reduce domestic departures by 16 percent beginning in September and cut the size of its fleet. Chief Executive Larry Kellner and President Jeff Smisek have declined to take their salaries for the rest of the year.


The moves follow recent announcements by American and Delta of similar contractions in service. As more airlines go out of business or reduce flights, consumers can expect to pay more for the remaining seats – and stand in longer lines to get them.



"Today we are taking additional, aggressive steps that demonstrate our commitment to size our business appropriately to reflect the current market reality, leverage capacity discipline to pass commodity costs on to customers, develop new revenue streams and continue to reduce non-fuel costs and capital expenditures," said Glenn Tilton, United's chairman, president and CEO.


United blames the move on skyrocketing jet fuel costs and a softening economy. With fuel at current prices, the company said it must overcome what it calls "a $3 billion challenge."


United says it is targeting its oldest and least fuel-efficient jets for retirement. The majority of schedule changes related to the elimination of 30 B737s previously announced are currently reflected in reservation systems, it said.


Further changes related to the retirement of an additional 50 aircraft by year end will be reflected in these systems in the near future. Schedule changes will be principally accommodated through modest reductions of under-performing markets and through frequency reductions while retaining a commitment to all five U.S. hubs.


About 80 planes are expected to be out of the system by the end of 2008, with the other 20 coming out by the end of 2009. The fleet reduction also includes six Boeing 747s.


United also said it expects to reduce the number of salaried and management employees and contractors by 1,400-1,600, including the previously announced 500 employee reduction by year-end, and the company will determine the number of front-line employee furloughs as it finalizes the schedule over the next month.



Continental said it will cut 3,000 jobs and reduce fourth-quarter domestic departures by 16 percent.


The departure cuts will result in capacity falling 11% in the fourth quarter. The company said it would release details of the cuts by the end of next week.


Continental said it is accelerating the retirement of Boeing 737-300s and 500s. By the end of next year it will have stopped flying 737-300s, a less fuel-efficient plane.


Industry in crisis

The fuel crisis couldn't come at a worse time for U.S. carriers. Many legacy carriers have just emerged from bankruptcy and smaller airlines that have been struggling to gain a toehold in the market face rapid extinction.


The International Air Transport Association (IATA) has revised its industry financial forecast for 2008 sharply lower, now projecting a loss for the industry of $2.3 billion.


But in fact, the picture may be even bleaker. The forecast uses a consensus oil price of $106.5 per barrel crude. But oil prices haven't been that low in several weeks. The price hit $135 a barrel in late May, before retreating slightly.


"For every dollar that the price of fuel increases, our costs go up by $1.6 billion," said Giovanni Bisignani, IATA Director General and CEO. The industry's total fuel bill in 2008 is expected to be $176 billion, accounting for 34 percent of operating costs. This is $40 billion more than the 2006 bill, which was $136 billion In 2002, the bill was $40 billion, equal to 13 percent of costs.


"We also need to take a reality check. Despite the consensus of experts on the oil price, today's oil prices make the $2.3 billion loss look optimistic," said Bisignani. For every dollar that the oil price increases, we add $1.6 billion to costs. If we see $135 oil for the rest of the year, losses could be $6.1 billion."


Bisignani tends to be more pessimistic than optimistic, noting the situation has changed dramatically in recent weeks. Oil skyrocketing above US$130 per barrel, bringing the industry into what he calls "uncharted territory." Add in the weakening global economy, he says, and you have yet another perfect storm."


"Oil is changing everything," said Bisignani. "There are no easy answers."


He notes than in the last six years, airlines improved fuel efficiency by 19 percent and reduced non-fuel unit costs by 18 percent. There is no fat left, he says.


Airline passengers have begun paying some of these extra costs in the form of additional fees for baggage and other services, but the other shoe may not have yet dropped. The CEO of Delta Airlines has said his company needs to increase air fares by 20 percent, just to stay even with fuel costs.


Silverjet, pretzels

U.K.-based Silverjet PLC had been operating flights from London's Luton Airport to New York and Dubai but failed to secure an emergency cash injection from a United Arab Emirates investor and shut down its operations Friday. Silverjet said it is still seeking additional funding but hasn't reached any agreement.


Meanwhile, US Airways has stopped serving free pretzels. But airline spokesman Phil Gee said economy-class passengers will still be offered complimentary non-alcoholic beverages on all routes. He said the carrier would also stop serving Biscoff cookies during early morning flights, although passengers can still expect to receive free hot beverages.


Last month, American Airlines became the first U.S. carrier to tack on a service charge for the first bag passengers check. The $15 fee, which starts June 15, will help offset higher fuel costs, the airline said.


American said it would also raise other fees for services ranging from reservation help to oversized bags. The other fees will mostly range from $5 to $50 per service.


American also said it would reduce domestic passenger capacity by 11 to 12 percent in the fourth quarter of 2008, retiring at least 75 mainline and regional aircraft. American said the cuts are unavoidable.


Air Midwest, Aloha Airlines, ATA and Skybus all suspended operations within the last two months. Frontier filed for bankruptcy but continued operating.

-- Sucheta Dalal