Carriers Resist Capacity Hike

As major U.S. carriers enter the peak summer travel season beginning in late May, they are poised to keep its hold on domestic seat supply, according to June OAG schedule data for the nine largest U.S. airlines pulled this month for BTN.

Airline executives have pinpointed capacity discipline as their salvation. Despite some forecasts that point to modest growth later in the year, major domestic carriers have restrained from adding U.S. seats. Further blocking capacity additions, new entrants that have emerged at this point in other up-cycles are nowhere to be found and even those back-fillers of yore—the so-called low-cost carriers—either are holding the line on growth or tempering it from historical averages.

"Wherever seats go in, airline industry profits go away," UBS aviation analyst Kevin Crissey said during the Strategic Travel Symposium, presented last month in New York by BTN and the National Business Travel Association.

That's a message legacy carriers embraced in the past two years.

According to a UBS forecast issued prior to the symposium, domestic airlines are expected to slowly add supply this year, though full-year growth should register only a modest 1 percent from 2009 levels, following two years of sustained capacity cuts. For the first three months of 2010, airline schedules show capacity down from the same period last year by 2 percent, according to a UBS research note examining the top nine U.S. carriers. In the second quarter, carriers plan to add a mere 0.5 percent capacity, schedules show. However, UBS forecast carriers to add 2 percent year over year in the third quarter and 3 percent in the fourth.

Citing similar J.P. Morgan 2010 estimates of relatively flat seat growth compared with last year, US Airways COO Robert Isom said during the J.P. Morgan Aviation, Transportation & Defense Conference last month, "The industry as a whole in 2009 took out about 6 percent of capacity. We did our share with 4.5 percent." Though US Airways leads its competitors in the number of available seat miles added at the start of the peak season in June, compared with the same period last year, Isom added, "As we look forward, we want to make sure that discipline is maintained going into 2010."

Other major airlines gave a similarly flat capacity outlook, with several noting a return to pricing power is dependent on keeping supply matched to demand.

"When measured against 2007, 2009 mainline domestic capacity for the network carriers was down a whopping 14.5 percent," American Airlines CFO Tom Horton said last month. To put that in perspective, American held the largest domestic marketshare between December 2008 and November 2009 at 13.9 percent, according to the Department of Transportation's Bureau of Transportation Statistics data, meaning the industry has shed domestic capacity that matches the size of the largest legacy carrier. AA in a quarterly report earlier this year said its domestic capacity would decline by 0.5 percent this year.

Delta Air Lines president Ed Bastian said system capacity was down between 4 and 5 percent in the first quarter, and the carrier would "continue to maintain that level of capacity restraint."

United Airlines CFO Kathryn Mikells, meanwhile, told investors during the J.P. Morgan conference that there is little likelihood of new entrants filling supply gaps since capital remains elusive and variable costs, like fuel, make up a growing portion of the airline cost structure, further deterring startups.

Despite the dearth of new entrants, some low-cost carriers are in fact adding capacity in 2010. "That's why the legacy carriers don't love a Southwest or a JetBlue or an AirTran, because they do typically come in and backfill," Crissey said during the Strategic Travel Symposium. "That wasn't the case over the past few years, but over the longer history that is exactly what's happened."

Still, UBS in a February research note reported that low-cost carriers have returned to modest growth "but not nearly to past double-digit levels" that preceded the capacity purge of recent years. JetBlue and AirTran are leading that, while Southwest Airlines is surprising its legacy competitors by maintaining capacity levels this year.

JetBlue earlier this year expected to increase full-year capacity between 5 percent and 7 percent, compared with 2009. That upswing is driven by growth in both the Boston and Caribbean markets, as capacity throughout the rest of its network is on pace to decrease, the carrier reported. AirTran in February said that it would grow capacity by 7 percent or 8 percent in the first quarter, with plans to grow available seat miles this year by 3 percent or 4 percent.

Once a key driver of industry growth, Southwest for the first time in its history last year cut capacity-reducing available seat miles for the full year by about 5 percent and has maintained a commitment to holding that steady this year.

Beginning on Aug. 15, Southwest will make further cuts to its schedule, reducing systemwide daily roundtrips by 58, or about 3.4 percent, from its 2010 peak summer schedule. Though Southwest said some of the changes are seasonal, the cuts reflect the carrier's commitment to newfound capacity discipline and a more dynamic network planning strategy.

Southwest lead schedule planner Bill Owen said on the carrier's website, "The banner headline about this new schedule would be 'Seasonality.' We're using our flight schedule optimizer more and more with every new schedule to respond to normal seasonal shifts in traffic. We're not just adjusting frequencies, but adding and deleting entire markets as needed."

How Empty Middle Seats Made It To The Endangered Species List

Demonstrating their capacity discipline in 2009, domestic airlines last year served the fewest passengers since 2004 but recorded the most crowded planes ever, according the U.S. Department of Transportation's Bureau of Transportation Statistics. BTS said nearly 40 million fewer domestic and international passengers took to the skies on U.S. carriers last year than in 2008, marking the lowest annual total since 2004. However, thanks to dramatic year-over-year capacity cuts of 6.3 percent in 2009 for domestic and international services, the U.S. industry's aggregate 81.1 percent annual load factor was the highest on record.