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Fuel turmoil to re-write US carrier balance in Asia

23-May-2008
  • Some key route regions already seeing an impact from soaring fuel prices including US-Asia market;
  • Delta-Northwest continuing to grow in Asia, Northwest gearing up for Tokyo expansion;
  • United-US Air deferring China expansion plans;
  • SkyTeam could emerge with dominant market position in Asia

The current fuel price turmoil will drive some significant long-term macro structural and competitive changes in the airline industry. But some key route regions are already seeing an impact, including the strategically important US-Asia market.

The Delta-Northwest combination marries Northwest’s strong position in Asia with Delta’s US East Coast and Atlantic operation, and both carriers have so far committed to continuing to expand their international development.

Assuming they can weather the current fuel price storm, the SkyTeam partners, which overnight received a boost with expanded antitrust immunity on the Atlantic, could develop a dominant position in Asia in a few short years, as they reinforce their Pacific networks, and gain from a strengthened Air France-KLM impact from Europe and the strong China Southern and Korean Air networks within the region.

Northwest, with over 20 daily departures from Tokyo Narita, is particularly well placed to benefit from Narita’s slot expansion in 2010. It has 17 firm orders for the B787 (and options for 50 more – the most of any US carrier) and plans to use the aircraft to serve trans-Pacific markets. But it is also eyeing an expanded intra-Asian network from Narita, including more destinations in China. The merger Delta-Northwest will also restore the Tokyo-New York service, which Northwest suspended in 2005.

Following an expansion of the US-China bilateral last year, Delta Air Lines, United Airlines and US Airways were the big winners, securing new service rights.

Northwest’s merger partner, Delta launched daily Atlanta-Shanghai service on 31-Mar-08 – completing a sustained long-term effort by the carrier to enter the high potential Chinese market. Meanwhile, Northwest Airlines announced plans to launch daily non-stop Seattle-Beijing service in Mar-09. To facilitate the new route, Northwest will temporarily suspend Tokyo-Guangzhou service to free up an A330. (Hainan Airlines plans to launch four times weekly Beijing-Seattle service next month with A330-200 equipment, and is seeking a codeshare partner on the route). Northwest is also launching non-stop Detroit-Shanghai service in Mar-09.

But the other big US merger combination based on the Star Alliance members, United Airlines and US Airways, is baulking at further Asian expansion – at least for now – which could play into SkyTeam’s hands.

US Airways has requested a one-year delay from the US Department of Transportation to the launch of Philadelphia-Beijing service, from Spring 2009 to Spring 2010, due to fuel price pressures, while United Airlines recently sought a one-year delay to the launch of San Francisco-Guangzhou service.

US Airways President, Scott Kirby, stated, “at today's prices, the fuel cost alone of running this single service would be more than USD90 million a year, about USD40 million higher than the estimates we made when we filed for the route. We're optimistic that economic conditions will be on the upswing in 2010, giving us a better chance of success with our first route to China”.

In isolation, these decisions, are understandable in perilous times. But they can add up to big-picture competitive shifts in the landscape. There will be many more to come, as the fuel crisis washes through airline route planning decisions.

(Meanwhile, the fuel price surge looks as though it could claim another casualty in the form of Mesa Air, which stated it may soon seek bankruptcy protection. Mesa has established the first foreign-airline invested passenger carrier in China, Kunpeng Airlines. The future of the aggressively expanding Xi’an-based carrier could be thrown into jeopardy if its parent is forced into creditor protection).


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