For airline analysts, the big headline from earnings season
so far has been United's plans to grow capacity aggressively over the next few
years. While this likely will keep U.S. domestic fares under control for
buyers, an all-out fare war remains a more remote possibility.
Q4 2017 YOY Capacity Growth
Alaska: 10.4%*
American: 2.4%
Delta: 2.3%
JetBlue: 5.1%
Southwest: 2%
United: 4%
*Includes December 2016 Virgin America capacity
Source: Airline earnings reports
United plans to
increase capacity year over year in 2018 by between 4 percent and 6 percent
and to implement a similar rate of growth in 2019 and 2020, United president
Scott Kirby said. A good portion of that growth will connect regional markets
to its hub, like the Rochester, Minn.-Chicago O'Hare service that began in June.
Executives see that as a correction to cuts made in recent years, as United had
shifted many of its regional aircraft out of those markets to take on American
Airlines and Delta on some of their key routes. "The opportunity with
United is not about shrinking," Kirby said. "It's about growing back
to where United should have been had it not went to negative-8 percent growth
the last several years."
Wall Street analysts, whose primary concern is profitability
and unit revenue growth, reached for antacids following the announcement.
"While the relationship between [capacity] growth and pricing is a bit
overrated, it still matters," Wolfe Research's Hunter Keay wrote, calling
United's capacity announcement a "dark turn."
So What Should Buyers
Expect in Terms of Pricing?
In its 2018 forecast, American Express Global Business
Travel projected "only modest rate increases" on domestic routes.
They predict that capacity growth and "intense competition" will counteract
demand growth, which is projected to remain strong on the corporate side. Delta
kicked off this year with its most
positive corporate demand outlook in three years, according to Delta
president Glen Hauenstein.
In American Airlines' earnings call, which came shortly
after United's, CEO Doug Parker said American's year-over-year capacity growth
for the year, slated for 2.5 percent, would be strategic as not to dilute
profitability. "We're taking existing aircraft, increasing the utilization
and redeploying aircraft from markets that maybe aren't doing as well to places
where we know we can do well," he said, "We're growing where we have
a competitive advantage, and we're creating better connecting markets."
Alaska Airlines, which has been in growth mode since it
acquired Virgin America at the end of 2016, will
stabilize its growth this year and continue to slow in subsequent years,
CEO Brad Tilden said. The carrier last year noted that its transcontinental
fares in particular have been under pressure thanks to competition from
JetBlue and basic economy fares, which Alaska is considering adding this year.
Meanwhile, other factors will give airlines pricing strength
this year. United, for example, has switched to a new revenue management system
that should be fully functional by the second quarter. Chief commercial officer
and EVP Andrew Nocella had said it would better forecast demand and allow
United to attract higher-yielding passengers. Southwest, meanwhile, expects to
benefit from the reservations system to which it switched last year.
Fuel prices also could be a big factor in fares this year,
according to the Amex GBT forecast. "Industry forecasts for 2018 span a
wide range of potential outcomes, but rising U.S. shale production, increased
use of [renewable] energy and uncertain capacity discipline among oil-producing
nations will likely result in only moderate increases in oil prices for another
year," the forecast said. "However, with fewer carriers hedging fuel
costs and many having already invested in better infrastructure or increased
employee salaries, a major jump in fuel prices would likely result in the
return of significant fuel charges and higher airfares."