Every CEO addressing the Merrill Lynch Global Transportation Conference predicted more capacity cuts beyond those already announced. Delta said that it would probably impose more cuts on its Delta Connection carriers beyond the 70 aircraft already announced as superfluous. Delta President and CFO Ed Bastion said Delta will hike its domestic capacity cuts by another three percent, beyond the 10 percent already announced.
“Just to clarify, we did not exit the Mesa and Pinnacle contracts because we had excess capacity,” Bastion told analysts. "We exited those contracts because they weren’t meeting our service obligations to our customers. In fact, both were running fairly miserable operations with less than 95 completion rate and that doesn’t meet the Delta standards for customer performance. That said, there is still a need to reduce capacity. As you know the smaller regional jets are the least economic and we happen to be longest with respect of almost anybody, I think, on small gauge rj flying. We are looking for any opportunities through reduced utilization, contract returns, or renegotiating with some of our partners to reduce amount of capacity dedicated to that flying. And with the Northwest merger we are going to be in a position as the player in the U.S. industry to have – I wouldn’t call it leverage – but certainly we will have some scale with respect to who you want to partners with.”
Once the Northwest merger is completed, Delta/Northwest will operate roughly 40 percent of all regional jets across the U.S. industry, said Bastion. “There is a tremendous amount of opportunity as we rationalize that portfolio to drive the inefficiencies out,” he said. “The large base of regional jets will enhance our ability to make certain we are getting the right flying at the right costs.”
At press time, Pinnacle announced it is in discussions with Delta to resolve what it considers the wrongful termination amicably. Pinnacle is also reviewing available remedies it may have should the parties not resolve this issue satisfactorily.
At the same Merrill Lynch conference, SkyWest CEO Jerry Atkin commented on the dispute. “Right or wrong they do have a challenge of getting rid of aircraft and no legal way to do it unless someone messes up," he said, adding SkyWest is currently in discussions with Delta to help with fleet reductions and pointed to the elimination of four 50-seat aircraft in exchange for four CRJ 900. He also noted that ASA’s daily utilization has dropped from 10.5 hours to nine hours. However, some of the 10 percent drop in capacity in the Delta Connection operations was restored for the summer but would be taken out again in the fall. Atkin also said that its Irregular Operations suit against Delta would likely top $30 million rather than the $25 million originally thought. Related Story
As for its United operation, it has yet to receive a request to reduce its United Express fleet, according to Atkin, who added that the Midwest Connect operation was now up to 21 of the 25 aircraft the contract calls for. Speaking at the same conference, United Executive Vice President & CFO Frederic Brace said it does not expect any major changes to its United Express program from that already announced since United views its regional operations as a great way to retain its footprint in markets where it is reducing mainline capacity. Thus, it is not planning to reduce capacity beyond a tweak here and there.
In response to a question, United indicated bankruptcy would not provide much relief with the current economic crisis as it did five years ago when airlines chose that path to squeeze costs out. This time, said United’s Brace, bankruptcy won’t get lower fuel prices. The only reason to take such an action would be if an airline had a contractual impediment to doing what it needs to do to cut costs and capacity and United has no such impediment.

Continental Open to Re-regulation
In response to a question noting recent Congressional rhetoric about re-regulation, Continental CEO Larry Kellner indicated the company was open to any changes that might provide more stability for the industry. Related Story
“First, this is the most heavily regulated, deregulated industry there is,” he told assembled investment analysts. “But clearly the structure at the moment is broken. Nobody’s winning in the current situation. I don’t think it is good for our customers, our employees and the communities we serve to have this much volatility in the market. ” He said that one of the largest efforts impediments to the restoration of stability is the failure to solve the air traffic control situation.

At the same conference Alaska Air Group Chair Bill Ayers said the current crisis is far worse than that experienced after 9/11 “and is forcing more dramatic and permanent changes that were unimaginable a year ago.” He applauded Congressional efforts to reign in oil speculation and hoped for reform that would allow for the return of a supply-and-demand scenario on fuel.
Ayer also called the simplification of Horizon’s fleet to a single fleet type in the Bombardier Q400 a significant competitive advantage. “There is little reduction in speed and a tiny increase in block time for quite a bit of fuel savings,” he said.
Horizon President Jeff Pinneo agreed saying that the cost savings of the Q400 trumped the flexibility afforded by multiple fleet types. He also indicated that the Q400 allows the airline to serve markets such as Santa Rosa, Calif. which cannot now accommodate regional jets.

Northwest CEO Doug Steenland detailed new capacity cuts during the conference. “In response to these extraordinary fuel costs, we are taking prudent actions to reduce our capacity and right-size the airline,” Steenland said. “This will allow us to better match our capacity to customer demand as airfares, by necessity, must increase.”
Northwest will reduce its system mainline capacity (domestic and international) in the fourth quarter of 2008 by 8.5 percent - 9.5 percent versus the fourth quarter of 2007, including the reductions announced in April. However, unlike Continental, it plans no station closures. Related Story Northwest is still analyzing the impact on employees but said it would rely on voluntary separations. He did not outline the impact on the Northwest Airlink program except to say that domestic capacity, including the regional routes, would drop seven to eight percent.
During the conference US Airways noted that the only flexibility it has with additional capacity cuts is with the Embraer ERJ 190 fleet, which could take capacity down another two percent. However, for now, the aircraft are staying in the active fleet.