Airline Capacity Cuts May Not Hurt LV

One of the key tourism pipelines to Las Vegas is reducing expansion plans nationwide in response to the weakening U.S. economy.

Southwest Airlines, which flies more than 1.2 million passengers a month to and from McCarran International Airport, announced this week that it is slowing its capacity growth by adding only five to 10 jets to its fleet in 2008, about half of what it planned. At one time, Southwest was projecting adding 35 jets to its fleet in 2008.

The airline gave no indication where it would cut capacity, saying schedule changes would occur in the spring.

Southwest joined other airlines that are either scaling back growth or cutting capacity in response to soaring fuel prices and waning consumer confidence damaged by the weakened housing industry.

Southern Nevada 's tourism industry is dependent on airlines delivering planeloads of visitors to fill hotel rooms, both leisure travelers on weekends and conventioneers in the middle of the week.

Capacity reductions come at a time when one of the city's high-end operators, Las Vegas Sands, is preparing to open 3,000 hotel suites later this month at the Palazzo.

Economic analyst Jeremy Aguero of Applied Analysis of Las Vegas said Las Vegans shouldn't be too concerned just yet.

"It's important to monitor the situation, since in any given month Southwest Airlines can account for 30 percent of our arrivals at McCarran," Aguero said, "and realistically, we can't turn a blind eye to what's going on nationally.

"But this is a reaction to reduced demand nationally, not locally," he said. "Southwest is in the business of placing supply where there is demand and based on our 90 percent occupancy rate, I'd say there is considerable demand."

Aguero bolsters his case by noting that McCarran passenger counts continue to be at record levels with the 4.07 million passengers arriving in October taking the 2007 total to more than 40 million.

Visitors who flew to Las Vegas accounted for 46 percent of Las Vegas ' 38.9 million visitors in 2006, according to the Las Vegas Convention and Visitors Authority.

A spokesman for McCarran said Delta and Southwest haven't publicly stated what they plan to do with Las Vegas capacity, if anything.

Spokesman Chris Jones said the airport projects scheduled operations and seat capacity to be up between 4 percent and 5 percent over last year by January.

McCarran is Southwest's busiest station, and the airline has promised growth in Las Vegas next year after opening a new crew base locally last month.

The planned capacity reduction will be the second in less than a year for Southwest, which trimmed unprofitable routes in its fall schedule. Las Vegas was virtually unaffected by those reductions. Two long-haul flights were eliminated, but two others were added. Southwest currently has about 235 daily flights to and from Las Vegas , by far the largest operator in the market.

Laura Wright, senior vice president of finance and chief financial officer for Southwest, told analysts attending the Calyon Securities U.S. Airline Conference in New York on Dec. 4 that the airline is focusing on maximizing profits with technology and new revenue management initiatives.

The company recently unveiled new aircraft boarding strategies designed to appeal to business travelers and enhanced its frequent-flier program in a bid to boost sales and keep loyal customers in the highly competitive market.

Southwest is optimistic it can add $1 billion to annual revenue by 2010 with its new "Business Select" fares that enable passengers who pay more to cut to the head of the line in the airline's open-seating boarding process. That fare also gives those passengers bonus frequent-flier credits and a free cocktails.

"Our goal is to grow revenues while staying true to our low-cost heritage," Wright said. "We feel that we can continue to offer low fares for both the leisure and business traveler and increase revenue by offering an enhanced travel experience."

One of the advantages of the airline taking delivery of new aircraft is that it will retire older, less fuel-efficient jets at the same time. Rising fuel costs have taken their toll on other air carriers with some carriers parking planes that are inefficient.

Delta Air Lines, the fourth-busiest operator at McCarran, blamed higher-than-expected fuel costs when projecting its operating profit margin target to a range of zero percent to negative 2 percent. In October, the company was looking at posting profits of 3 percent to 5 percent.

Delta parked 13 aircraft this quarter and in January plans to ground the equivalent of 10 domestic jets and 35 regional jets on commuter runs. Some of those planes will be shifted to international runs where demand is expected to be stronger.

American Airlines late last month announced plans to spin off its American Eagle commuter affiliate, a bid most analysts viewed as an effort to cut costs, focus on its mainline business and prop up its stock price.

United Airlines, the No. 3 carrier at McCarran, is grounding planes in a bid to reduce capacity by 3 percent to 4 percent. Like Delta, United hopes to strengthen its bottom line by adding international capacity.

Locally, Las Vegas -based Allegiant Air also has been stung by high fuel costs.

With the cost of jet fuel climbing to near-record levels, Allegiant decided to drop its six longest flights to and from McCarran, including one route that hasn't been implemented.

The cuts are expected to be completed by the end of the holiday travel period and affect flights between Las Vegas and Lansing, Mich. ; Gulfport, Miss. ; Huntsville, Ala. ; and Marion, Springfield and Champagne, Ill. Allegiant was planning to start service to Marion later this year.

US Airways, the No. 2 operator at McCarran, has begun seasonal cutbacks on flights to Las Vegas resulting in passenger counts down by 21 percent in October. For the year, traffic is up 3.5 percent for US Airways to 8.07 million passengers.

Wright told analysts that Southwest will continue to work with code-share partner ATA to offer international flights to Canada , Mexico and the Caribbean , but the airline has no plans to offer overseas or international flights on its own.

The company will continue to monitor a new competitor, Virgin America, which is viewed as a small but up-and-coming threat.

"We have to view Virgin America as a threat and take what they're doing very seriously," Wright said.