Tuesday, 16 August 2011

Aer Lingus; No Business Case for US West Coast Route ©

Aer Lingus yesterday quashed speculation of the carrier resuming a route from Dublin to the US West Coast after completing an analysis, stating it would result in significant losses, in the present environment the business case for opening the route does not simply exist, therefore it was a prudent management decision.

The market dynamics for resuming a route from Dublin to the US West Coast have changed significantly since the carrier axed the San Francisco route in 2009, firstly the average cost of oil continues to increase, now will be a higher percentage of total costs on long-haul sectors.

The Irish and US economies have gone into recession as a result of the global financial crisis, which began in 2008, both countries plan to reduce spending and Ireland will have further tax increases as part of the EU/IMF Bail out programme, which will have an impact on the population, reducing disposable income for leisure travel, with high unemployment in the economies, this will further erode demand for air travel.

Aer Lingus too has evolved having entered into code-share and interline agreements with JetBlue Airways and United Airlines, enabling the carrier to offer connections across the USA through their US East Coast hubs in Boston, Chicago, New York JFK. Aer Lingus have stated on average 90 passengers per day connect to the US West Coast, through their US partners.

The carrier is currently engaged in a strategic review of key issues, firstly the evaluation of Project Greenfield, to see if it will be necessary to further reduce unit costs beyond those in the current Greenfield, secondly the carrier is weighing the business case to join one of the three Global Alliances versus developing its current partnerships.

The impacts of these two business cases , could have an impact on the future shape and size of its route network and future growth, therefore until these strategic reviews are completed, the analysis not to proceed with re-launching a US West Coast route is justified.

The Transatlantic market is evolving at a rapid pace being driven increasingly by Global Alliance Joint-Ventures, namely the Skyteam JV Alitalia/Air France/Delta Airlines and American Airlines/British Airways, Lufthansa Atlantic Plus (Austrian Airlines/BMI/Lufthansa/Swiss International), allowing the JV's have increasing economies of scale, leverage with suppliers and pricing power.

These Transatlantic JV's have major operational flexibility in terms of operating as an single entity, being able to match capacity to demand on their network, by pooling the resources of their fleets. The Air France/Delta Airlines JV has access to pool of  aircraft from both fleets including: Airbus A330-200/330/340/380's and Boeing 757-200/767-300/400ER's, Boeing 777-200/300ER's and Boeing 747-400's, thus enabling significant flexibility with their schedule planning and capacity/yield management.

The Transatlantic market is suffering overcapacity, with a number of carriers having flagged plans to reduce capacity Air France/Delta Airlines 10% reduction and the Air France Group has scaled back plans to grow long-haul capacity from 5.1% to 2.7%, the IAG Group will cut growth in Q4 from 7.6% to 6% and Lufthansa will cut capacity growth from 12% to 6% by examining its winter capacity in what it calls a 'new demand climate'.
 
The announcement will be disappointing for the lobby group established by John Hartnett, President and Founder of the Irish Technology Leaders Group (ITLG), which began a campaign last October, having established The Facebook group – “Direct flight - Ireland to Silicon Valley NON Stop!!” http://www.facebook.com/group.php?gid=158255310851881 ).

This group sees a route vital for the growth of the Irish IT Driven Smart Economy sector, with a high concentration of US MNC's, the route would be valuable time saving resource, rather than travelling via other European and US Hubs.
 
In conclusion the business case for resuming a route to the US West Coast does not exist, a combination of factors make the selection of an potential route unviable, when the economic recovery begins to take hold on both sides of the Atlantic, maybe the business case could be revisited.

I enclose a link to an interesting article correlating the relationship between US Wealth destruction and airline capacity

 Airlines Risk Deeper Seat Cuts on Economy

Irish Aviation Research Institute © 16th August 2011 
All Rights Reserved.

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