Over the last few years, many an airline CEO has talked about how important it is to keep capacity in check. In general, that’s the one tool that airlines can effectively use to increase unit revenue, but historically that hasn’t been as easy to use as it sounds. Fortunately, things may be looking better this time around.
Whenever one airline reduces capacity, there’s always the chance that another airline will see that as an opportunity to fill the market with more. If that happens, the first airline that reduced capacity by cutting frequencies will be in worse shape. The S-Curve of demand shows that the airlines with the most frequencies receive a disproportionate share of the traffic, especially the higher yielding business traffic. So whatever frequencies remain are not likely to do as well.
So, what is an airline to do? Well, there’s always the option of trying to operate smaller aircraft at the same level of frequency. But just swapping out aircraft like that is never easy. Sure, you can take all those big planes in Florida in the winter and shift them to Seattle and Cape Cod in the summer, but the ability to make substantial changes is limited by not being able to shed aircraft. Then there’s the issue of crew scheduling, airport staffing requirements, etc. It’s not an easy task.
This is one reason that many airlines have been pushing consolidation recently. Sure, there’s the obvious rationalization of overlapping capacity between the two airlines. As US Airways CEO Doug Parker reminded us at the airline’s Media Day earlier this year, the US Airways and America West merger achieved that. But beyond that, there is a general belief that if there are fewer cooks in the kitchen, hopefully the ones that remain will be smart enough to hold back on capacity so that the industry can actually price above its costs. Crazy idea, I know.
Personally, I don’t buy that argument. Even with consolidation, there are still usually plenty of airlines waiting to step in when someone abandons capacity. If there aren’t, there’s likely a startup with the “clever” idea of trying to step in and fill the void. (Heck, Skybus originally started as a way to replace capacity in Dayton after USAir pulled out.)
But this time around, it could be different. Capital has dried up in the industry (and elsewhere), so the chances of a new startup are slim to none. Most of the legacy carriers are playing nice so far – Delta, Northwest, US Airways, and United are all talking about capacity cuts. The question is how will the low cost carriers respond?
Many of them, including AirTran and Virgin America, have expensive aircraft on order, so they will be looking to put them somewhere. But those are also two airlines that are relatively low on cash, so they might be looking to slow growth if they can. If there was some restraint in this industry, there might be a shot at raising fares enough to avoid a complete bloodbath if demand softens. Now that would be crazy.
