Aviation News Online

Emirates cuts US capacity – is the hub-and-spoke model suffering?

You likely will have heard by now that Emirates is reducing its service to the United States in response to a drop in demand, which the airline says is a result of the U.S. government’s travel ban on certain countries and restrictions on electronic devices in cabins. Emirates will reduce the number of US cities it currently serves from 12 to five.

From May 1 and 23, respectively, flights to Fort Lauderdale and Orlando will drop from daily service to five time a week. On June 1 and 2, respectively, service to Seattle and Boston will drop from twice-daily services to a daily service. And, starting July 1, flights to Los Angeles will also drop from twice-daily service to a daily service

Emirates is doing the right thing and if nothing else we can state clearly that the airline is being run well and is doing what is needed to keep capacity in line with demand. So, what’s the real story here? The fact that Emirates is cutting capacity again. Emirates, THY and Etihad are under real pressure and utilization figures across the three airlines are falling across the board – this is all part of a general shift away from airlines sending passengers via a hub transfer towards point-to-point travel again.

The major airlines and flag carriers such as British Airways, Lufthansa, SIA, Delta and American, have gradually managed to shift their products and pricing while maintaining yield and in the process they have cabins, entertainment and most importantly pricing that closely matches that of Emirates. Now that the product and the price point are not far off the Emirates level, passengers are opting to travel by the fastest possible means, which is direct point-to-point travel. As Emirates and the like cut capacity, the stopovers in many instances become longer and thus the situation is exacerbated. When you see capacity cuts for the big Middle East major airlines, it is wise to check to see what this will do to stop over times on many flight options as that is what will damage them most in the long term and that is the curse of their otherwise outstanding business model.

To be fair to Emirates, Etihad and THY, they have become premium brands (the latter damaged by political circumstances of late) and have managed to grow rapidly whilst remaining in profit, but now it is time to look far more closely at how the business model and how it copes with contraction.

It is a great day for many in the airline sector though after the EIA data released last night showed that the U.S. oil surplus had increased by 1.5m barrels.  Oil prices fell by over 4% back towards $50. It remains too dangerous to hedge perhaps but it is hoped that even though oil production in the Middle East is at a historic low with investment in infrastructure also at a historic low, North American production and increases in European fracking can overcome worries.

Date: April 20, 2017

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