With fewer flights, analysts expected better punctuality

With fewer people flying aboard fewer planes, industry mavens could not agree on why most airlines' on-time percentages have failed to improve significantly.

Major airlines as a group reported an improvement in on-time arrivals of 2.6 percentage points for 2008 compared with 2007, but analysts said they had expected better.

Though an improvement over 2007, the 2008 on-time percentage was 2.2 points below the industry’s 11-year average. The DOT started keeping track of on-time performance in 1987.

Logic suggests that the airlines should be doing much better with on-time performance, given capacity cuts and traffic decreases, industry experts said.

The reasons they are not doing better might speak to the complexity of airline operations, with their many moving pieces. It could be weather. It could be labor. It could be seasonal congestion.

"That’s a puzzle," said Robert Poole of the Reason Foundation.

Airlines boarded 3.5% fewer passengers during the 12-month period that ended in November than they boarded during same period a year earlier, the DOT reported.

Air traffic, as measured by revenue passenger miles, fell by about 2% during that time, while the carriers cut capacity by about 1%.

Capacity drops, demand plummets

Moreover, the drop in demand appears to be accelerating as the recession deepens.

The number of scheduled domestic and international passengers on U.S. airlines in November 2008 declined by 12.8% compared with November 2007, the largest year-over-year decrease since January 2002, the DOT reported.

For December, all major carriers except JetBlue reported capacity cuts, and all carriers except Delta, Southwest and AirTran reported a traffic drop.

For January, all major carriers reported capacity cuts, and all carriers except AirTran reported a drop in traffic. Eight of the top 10 airlines also reported that on a percentage basis, their passenger traffic losses had outpaced their capacity cuts for the month.

American, for example, reported an 8.3% cut in capacity for January but an 11.7% drop in traffic. Southwest reported a 4.4% drop in capacity but a 9.9% drop in traffic.

"The airline business is going to get even smaller this year," analyst Vaughn Cordle of AirlineForecasts predicted. "I think we’re going to see a 6% to 9% further cut in capacity."

Delta President Edward Bastian told analysts in January, "We’re still expecting to reduce system capacity by 6% to 8% for 2009, but if demand deteriorates from where we are, we’re prepared to take quick action to remove additional capacity."

Delta plans to close 170 gates this year throughout its network as a result of its merger with Northwest.

But despite all the cuts and traffic losses, the DOT’s monthly on-time report shows that the leading airlines achieved an average on-time arrival rate in December of 65.3%, a mere 1-point improvement over the same month a year ago.

In fact, seven of the 10 largest airlines’ on-time performance worsened in December.

Airline executives and analysts said a series of winter storms that battered the U.S. was to blame for the poor showing.

"Weather is the most likely explanation," Poole said.

Darin Lee, a principal of the consulting firm LECG, said, "Weather and congestion in the New York City area can often play a big role in delays."

A labor problem?

But Cordle, for one, doesn’t buy that reasoning. He believes that the inability of the airlines to show greater improvement in their on-time performance over the course of the year despite capacity cuts, traffic decreases and falling load factors suggests something besides weather or seasonal congestion concerns.

As the airlines cut down on capacity, they are also reducing their workforce and trying to squeeze more productivity out their remaining staff and operations.

The airlines, Cordle said, have cut into their employee-per-passenger ratio, which he believes is affecting on-time performance. Airline labor costs have dropped by about 40% since the mid-1990s, he said.

"The financial distress of the airlines gets to the heart of the industry’s inability to provide on-time service," he said. "As they have had to bring down capacity, they’ve had to spread fixed costs over fewer seats."

Lee disagrees with that assessment.

"While I can see how some might believe that, it overlooks the fact that delays are quite costly for airlines, and their incentive is to minimize delays," he said. "For example, US Airways pays out millions of dollars to its employees in monthly bonuses if they are in the top three in on-time performance each month."

That incentive plan just might be working. For 2008, US Airways ranked second in on-time arrivals, after Southwest, with an average of 80.1%. That was an improvement of 11.4 points over its 2007 performance, by far the biggest increase among the top carriers.

Even so, Lee acknowledged, "For some carriers, there were obviously specific labor disruptions that resulted in some big spikes in delays."

As an example, he cited United, which went to court stop a summer pilot "sickout" that caused thousands of delays.

In the meantime, the airline workforce continues to shrink. The number of full-time-equivalent employees dropped by 3.2% over the 12-month period ending in November, the DOT said. Over the four-year period ending that month, the workforce shrank by about 8.7%.

At the same time, DOT data show that the number of full-time-equivalent employees per aircraft dropped from nearly 110 to just above 90 from 2002 to 2007, while the average monthly originating passengers per employee increased from nearly 60 to 90 during the same period.

With that kind of stress on the system, Cordle said, the combination of capacity cuts starting in mid-2008 and a simultaneous focus on squeezing more productivity out of fewer employees kept airlines from boosting their on-time performance.

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