Pledges of capacity control rang across the three largest
U.S. airlines' first-quarter earnings calls, and analysts buy it as a long-term
trend.
As carriers grappled with volatile currencies, Delta Air
Lines president Ed Bastian said Delta will cut transatlantic capacity in the
fourth quarter as much as 2 percent year over year, largely via a 15 percent to
20 percent reduction to Africa, India and the Middle East, as well as
suspension of winter service to Moscow.
United Airlines this quarter will reduce capacity in Japan
by 11 percent in response to weakening currency and in energy markets like
North Dakota and Canada as corporate demand from that sector declines, United
vice chairman and chief revenue officer Jim Compton said.
And American Airlines has lowered capacity plans for 2015
and scaled back international capacity plans for four quarters in a row. All
three airlines, meanwhile, reported substantial profits for the first quarter.
Some travel buyers are bracing for higher air costs this
year. "Knowing that the airlines are playing with their capacity ... those
costs will increase," Oracle global travel process officer Rita Visser
said during last month's CAPA Americas Aviation Summit. "Even if all
remains equal and we don't do one additional transaction this year, then yes,
we will pay more."
Airlines' ability to control capacity is nothing new. Hotel
companies are beholden to the ebb and flow of regional demand surrounding a
property, but airlines can shift aircraft from troubled markets. Resisting the
urge to pump capacity into the market, though, has been a different story.
"The airline industry has been a very undisciplined
industry over the years," CRT Capital Group managing director and co-head
of research Mike Derchin said at the CAPA summit. "It's too easy to get
planes, and there are too many ways to finance them."
This time, however, might be a different story. The industry
has changed, Deutsche Bank managing director and airline analyst Michael
Linenberg said. Through consolidation, the top four domestic U.S. carriers
control 80 percent to 85 percent of the market, compared with about 60 percent
20 years ago, he said. And the likelihood of a glut of new entries is low, he
added. "Barriers to entry are the highest since deregulation. The
financial strength of the major carriers is a barrier. ... The formation of
airlines tended to peak during the worst of times, when big carriers were
financially weak and airplanes were cheap."
The carriers' internal organizations also have changed. Many
now tie executive compensation to return on invested capital, which will encourage
discipline, Linenberg said. Similarly, American Airlines CEO Doug Parker said
he would drop cash compensation and be paid fully in stock.
While airlines need to test their mettle in the next down
cycle, it is conceivable that they've transformed themselves from a boom/bust
industry—"in the booms, they made millions, and in the busts, they lost billions,"
Derchin said—into one that could make millions even in the slower times,
analysts said.
In the short term, capacity control does not mean
downsizing, as airlines still plan to increase capacity year over year and are
investing in fleet improvements. Cowen and Co. managing director and senior
airline analyst Helane Becker said that down the road, international expansion
will be "a great opportunity for U.S. airlines because they have ignored
it for a long time, as they've had to get their domestic house in order."
Budding competitors, too, will have chances to add capacity. "While we see lack of slots, gates and counter space in the key airports, some smaller airports have been abandoned by the big carriers," Linenberg said. "Markets like Cincinnati, Cleveland, St. Louis and Pittsburgh are where we can see smaller carriers and ultra-low-cost carriers make their mark."
This report originally appeared in the May 2015
issue of Travel Procurement.