Profitability Foreign to U.S. Airlines Abroad : Transportation: Faced with a glut of seats, some carriers have announced reductions in service to Europe and Asia after expanding aggressively in the mid-1980s.
Disappointed by large losses and weak traffic on international routes, U.S. airline executives might be wondering why they left home in the first place.
While airlines have grown quickly overseas, profits have become scarce in the face of stiff competition, a glut of seats and economic weakness abroad. As a result, some domestic airlines have announced reductions in service to Europe and Asia after an aggressive and costly international expansion that began in the mid-1980s.
“The transatlantic is a complete disaster,” said John Stodden, a transportation analyst at Duff & Phelps/MCM in Chicago. “They are filling the planes with discount fares.”
International passengers have been the big winners, reaping bargain fares and the convenience of new international flights added by U.S. and foreign carriers. London-bound travelers, for instance, have a choice of eight daily non-stop flights from Los Angeles International Airport.
Round trips between Los Angeles and London--one of the most heavily traveled routes to Europe--sold for less than $500 this spring, travel agents say. Even now during the peak travel season, they sell for about $770--$200 to $300 less than a few years ago.
Diane McKenna, a branch manager for Carlson Travel in Century City, said clients often remark that they can fly to Europe cheaper than fly across the United States.
Despite current problems, the investment in international airline routes is a smart strategy in the long run because most of the passenger growth will be in those markets, industry observers say.
However, the size of the losses and prolonged weaknesses in some key international markets has worried some. “How much of this will pass and how of much of this is a long-term, structural problem?” asked transportation consultant David Hoppin.
Ironically, U.S. airlines looked at international skies as a haven from the fare wars, intense competition and slow growth they faced at home. In addition, U.S. airlines operated at much lower costs than most European and Asian competitors.
Beginning eight years ago, the largest U.S. carriers went on a buying spree: United forked over $715 million for Pan Am’s Pacific routes in 1985, while American paid $515 million for TWA’s routes to London and another $349 million for Eastern’s Latin American operations in 1990. Delta bid more than $600 million for Pan Am’s European routes.
Until recent years, the investment in the Pacific paid off handsomely for United, and Latin America continues to be one of the few bright spots for American. “Latin America is one of the most regulated markets around, so the pricing is very good,” said Hoppin.
But, in a case of bad corporate timing, U.S. airlines expanded service to Europe just as the domestic and European economies began to weaken and the Persian Gulf War sent foreign travel into a tailspin from which it is still trying to recover.
Delta Airlines’ European operations lost $611 million during the fiscal year ended March 31. The Atlanta-based carrier will eliminate Miami-Frankfurt later this year and has already begun discounting fall fares to Europe.
American Airlines, which had sought to offer daily, year-around flights on European routes, said this fall it will temporarily suspend Chicago-Berlin service as well as flights from Dallas to Brussels and Madrid.”The European market has not performed as well as we would have liked,” said American spokesman Al Becker.
Meanwhile, United and Northwest airlines saw their once immensely profitable Pacific operations erode under the weakness of the Japanese economy and the start-up of several new Asian competitors.
“There are a lot more seats across the Pacific than there were just a short time ago,” said James D. Faulkner, a spokesman for Northwest. In the past year, the airline has reduced capacity by 12% and eliminated some direct flights.
