Major U.S. airlines are taking even more domestic capacity out of the market this year in efforts to mitigate the impact of fuel costs and drive pricing efforts.
All legacy airlines during recent fourth-quarter earnings calls forecasted negative, or at best flat, capacity growth for full-year 2008, continuing the trend of shifting business to growing international networks. Should the economy take a deeper downward turn this year, carriers said that they are willing to take even more seats out of the domestic market.
"The domestic network as a whole has not been profitable at lower fuel prices, so it will be less profitable yet at higher fuel prices," said Robert Mann, president of airline consultancy R.W. Mann & Co. "There seems to be no sense that fuel prices will abate. That just says that more of the domestic network is at risk. It will come down to providing domestic capacity only in those markets where pricing is compensatory and where you need seats to connect to international long-haul journeys. Overall, the amount of domestic capacity will continue to drop and we'll probably see more replacement by regional partner flying."
According to OAG airline data on scheduled services, there were 474,891 fewer domestic seats—roughly 1 percent of the market—in service last month than there was in January 2007.
US Airways CEO Doug Parker during the carrier's fourth-quarter earnings call last month said he was "encouraged by the industry's capacity restraint." Like other legacy carriers, he said US Airways could further scale back the number of available seats should the economy slow further. Parker and other airline chief executives said the cuts in capacity would enable carriers to charge higher fares.
United executive vice president and chief revenue officer John Tague, during the carrier's earnings call last month, summed it up: "Our willingness to be conservative with capacity deployment gives us a strong platform to launch and sustain fare actions that are necessary to offset rising fuel costs," said. "We have not hesitated to use that platform, as evidenced most recently by the introduction of the domestic fuel surcharge effort and our continued efforts to increase it even further."
Mann said the legacy carriers are cutting capacity to drive "compensatory pricing," even if that comes at the expense of deteriorating the industry's record-high load factors. United CEO Glenn Tilton concurred. "With load factors near historical high levels," he said, "we clearly have a willingness at United to forego a little traffic in favor of better yield."
The likelihood of major domestic airline consolidation this year has stoked corporate travel buyer fears that domestic capacity will further be cut. UBS analyst Kevin Crissey last month said that he expects to see a 2 percent reduction in overall capacity in 2008. A merger would cut another 4 percent, he said
(BTNonline, Jan. 22).Although such carriers as Southwest Airlines and JetBlue Airways steadily have been growing domestically, they have scaled back plans to further increase capacity amid jitters about a softening demand environment.
JetBlue expects to increase its capacity by between 5 percent and 8 percent, down slightly from earlier plans to add to capacity by up to 9 percent. Southwest last year reduced its capacity growth outlook from 8 percent to 6 percent for 2008 and 2009 in an effort to grow profits amid a slowing economy.
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