If forecasts come to pass, domestic airlines should add no more than 2.2 percent capacity this year over last and, according to American Airlines CEO Gerard Arpey, that bodes well for the industry since such a growth rate would track below the roughly 3 percent U.S. gross domestic product growth anticipated this year.
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"Responsible growth means growth that is consistent with GDP," Arpey said this month during the 2010 Bank of America Merrill Lynch Global Transportation Conference in New York, recounting a rule of thumb espoused by other executives and industry analysts. "If GDP is growing in a region at 2 or 3 percent, then generally carriers can grow responsibly inside that number and remain healthy."
Arpey is hardly alone. Airline executives and industry analysts have pointed to capacity discipline as the linchpin to the financial health of U.S. airlines.
Ever since domestic carriers in 2008, spurred by a fuel crisis with which they could barely cope, took a dramatic 9 percent of the available seat miles out of the system—roughly the size of a large, legacy airline—the industry has continued to constrain capacity.
"One of the most important things that happened in the industry is capacity discipline," US Airways president Scott Kirby said. "In 2009, you saw all airlines reduce capacity, following the spike in fuel and the bad revenue environment. What was unique about 2008 and 2009 capacity is that not only the legacy carriers reduced capacity, but for the first time in history of the industry the low-cost carriers by and large reduced capacity, with one exception—but even JetBlue reduced capacity in 2008."
According to an analysis of company reports and executive declarations by the firm Stifel Nicolaus, the total U.S. industry will add between 1.5 percent and 2.2. percent capacity, with the legacy airlines growing by no more than .5 percent and the low-cost carriers adding up to 5.7 percent capacity this year. Stifel Nicolaus airline analyst Hunter Keay in a research note this month said, "Capacity discipline remains the key to unit revenue acceleration, and we have heard nothing from most U.S. airlines indicating much appetite for incremental growth."
Once a key driver of industry growth, Southwest Airlines for the first time in its history last year cut capacity as it reduced full year available seat miles by about 5 percent. The carrier has maintained a commitment to holding that steady this year.
Even those so-called low-cost carriers who are adding capacity this year claim to be doing so in a responsible manner. "We think we've successfully repositioned the company from a hyper-growth company four or five years ago to a company that's much more disciplined," AirTran CEO Bob Fornaro said this month. "We think there are growth opportunities, and we think we can participate in those growth opportunities, but also, ultimately, we think discipline is important."
This year, AirTran expects to grow capacity by up to 4 percent, concentrated in Milwaukee, the Caribbean and, perhaps, some modest growth in its hub in Atlanta, Fornaro said. "If we keep our costs down and keep our quality high, I think we can continue to grow at a 4 to 5 percent rate—not a double-digit rate—but a reasonable rate," he said.
JetBlue CEO Dave Barger recounted a similar period of hyper-growth that has made way for more calculated capacity moves. "In 2006, we were taking a new airplane every 10 days," Barger told investors in New York this month. "Fast-forward, and we've slowed that growth down," noting that JetBlue in that time has deferred more than 100 aircraft, while selling and leasing other aircraft. Still, JetBlue this year is posting the highest growth rate, as it expects to increase full-year capacity between 6 percent and 8 percent, compared with 2009. That upswing is driven by growth in both the Boston and Caribbean markets, while capacity throughout the rest of its network is on pace to decrease, the carrier said.
Still, legacies see the furious pace of growth by low-cost or new entrant carriers as abating. "The low-cost carriers have not been growing at the pace that they were growing in the past, which was one of the other obstacles that we faced," Delta's Bastian said. "It's tough with fuel prices—even at today's $75 level, which may seem cheap compared to the past—to be a low-cost provider and be able to generate growth the way they've done in the past. That's adding another level of discipline to the marketplace."
Bastian cited another reason carriers won't start adding more seats than the market can consume. "We all have burnished in our minds that $147 oil price that we experienced two summers ago," Bastian said. "That has caused us all to think hard about not expanding and not over-investing in terms of fleet and capacity, for fear that oil prices could rocket on us."
The dramatic cuts in capacity have done more than reduce the number of seats in the market and reduce service to smaller communities. As carriers cut capacity, their networks are changing, Stifel Nicolaus' Keay said. "Legacy airlines have been increasingly retreating to their own hubs, where pricing power is best due to strong market share, and future international growth opportunities will likely exist." Such moves are exemplified by American Airlines' Cornerstone Strategy, which focuses on its hubs, and US Airways' U.S. network realignment that focuses almost exclusively on service to and from its Charlotte, Philadelphia and Phoenix hubs and three other cities, which combined will represent 99 percent of the airline's capacity by year-end.
"It's good to see the industry recognize we are in a mature industry," Kirby said. "This isn't a growth industry anymore."