Would A Stronger United Mean A Weaker Industry?

[Wretched Wrench]

http://www.nytimes.com/2004/06/13/business.../13atsb.html?th

 

[Winglet]

There's at least 20% too much capacity in the US airline system right now. Until that goes away, there's not going to be a recovery for the legacy airlines.

 

[kirkpatrick]

"Excess capacity" will never go away. It'll vary slightly as average load factors go up and down, but there will always be empty seats flying around.

MK

 

[DFWCC]

"K" I agree. Just look what history tells us. After 9/11, everyone cut back.
That didn't last long. When the majors cut back the low service airlines expanded.
What happens? Capacity control works only when everyone plays the game.
If any airline goes belly-up, all the others will swoop in to fill the gap.
If USAIR or U go, there will be trained crews and plenty of cheap metal in the market to fill the gap. Not to mention the the silver tubes in the dessert and the former flyers still looking to find a home in one of the most exciting industries on Earth.

 

[AAmech]

Overcapacity is hardly a problem. Right now most airlines including AA are settings records for Load Factors. The problem is low revenue because the price setters are the WN's and JB's.

 

[FWAAA]

Overcapacity is hardly a problem. Right now most airlines including AA are settings records for Load Factors. The problem is low revenue because the price setters are the WN's and JB's.

When I hear "overcapacity" it reminds me that there are too many carriers still trying to capture the few full-fare and high-yield passengers out there, and in that respect, there is still too much capacity.

If AA or UAL folded tomorrow, the other's F and J cabins would be sold-out on JFK-LAX/SFO. Same to LHR and NRT and all other destinations where the two directly compete.

The death of one would not mean salvation for the other, but it would certainly extend the game clock by a few years.

Other skeptics will certainly comment that the fares required to fill the planes (as you correctly observed) aren't high enough to be profitable - so the airlines would all be better off it one or more perished; then those unprofitable fares could just be left at the terminal. They could stay home. I'm not sure I agree with this analysis, but it's out there.

 

[jimntx]

Eliminating excess capacity does NOT mean that there would be no empty seats on any flights. Excess capacity is more than just the occurrence of empty seats. It means that the total number of available seats is always more than would be needed under the most unexpected circumstances.

If you build a freeway that can handle 5,000 cars an hour, and only 200 cars use that freeway between 3am and 4am, that is not excess capacity. But, if that same freeway never has more than 200 cars an hour, that is excess capacity.

 

[mweiss]

The definition here needs to have elaboration. Air travel capacity in this context would be defined relative to the number of seats that would be sold at a profit. Recall that many seats are sold below cost to reduce losses. So we can only look at the seats that are sold at a price above cost in order to accurately define capacity.

But...but...

Whose cost?

If you use B6 as the benchmark, for example, capacity would calculate much higher than using US (using the two extremes).

So it's not that easy to determine.

 

[kirkpatrick]

If you build a freeway that can handle 5,000 cars an hour, and only 200 cars use that freeway between 3am and 4am, that is not excess capacity. But, if that same freeway never has more than 200 cars an hour, that is excess capacity.

The problem with that analogy is that there are no competing freeways. If there were just one carrier on every route, they could set capacity to match demand with very few seats going out empty. If UA dropped from the picture, you can bet others would move in and we'd be right back where we started, after a lag time, of course.

Years ago I read that when loads exceed about 80%, the passenger starts feeling the inconvenience of not being able to get the flight he wants at the time he wants.

MK

 

[jimntx]

The problem with that analogy is that there are no competing freeways. If there were just one carrier on every route, they could set capacity to match demand with very few seats going out empty. If UA dropped from the picture, you can bet others would move in and we'd be right back where we started, after a lag time, of course.

Mk, I wasn't really setting up an analogy, just giving an example of excess capacity.

As far as the "fools rush in" idea, I'm not so sure. Granted if U or UAL were to fail, other airlines would try to fill the gap. But, you are assuming that they would simply replace the service with the same number and size of a/c and frequency of service lost in the failure. Not necessarily true. I'm not convinced that the airlines have learned nothing from the past 4 years.

AA, for instance, would have to recall furloughed flight attendants and pilots, but they would not necessarily have to acquire additional a/c. Even AA is learning the WN lesson that a/c sitting on the ground are not earning money.

Or, even if additional a/c are recalled from the desert (I'm continuing with the conceit that only AA would step in), that does not mean that the same number of seats would be brought back on line. Maybe UAL was running 5 757s a day on the ORD-DEN route (it's probably more, this is just an example) and they averaged half empty. Maybe AA would replace that service with 3-4 MD80s.

Or, say AA and UAL are already competing in the market, AA's flights are averaging a 50% load factor. I doubt they would add additional a/c to the route right away if UAL ceased service.

Any of these scenarios--more efficient use of a/c, smaller a/c, no additional a/c-- would reduce capacity.

I'm also not convinced that the LCCs are interested in serving a lot of the markets that U and UAL serve today. In some cases the LCCs don't have the right a/c to efficiently serve the market, or they are already competing in the market.

Some current U and/or UAL routes might be totally abandoned. I know that after Eastern went under, some smaller cities in the South lost all air service. Some of these have come back as regional airline stations, but that is a reduction of available seats in itself.

 

[mweiss]

All that you're doing is confirming that fools will, indeed, rush in. So they won't buy as many airplanes. So they'll be more efficient. So they'll have better CASM. So what? There will still be too many flights with too many seats.

Why?

A few reasons. One is that there are more competitors in the airline industry than in many others, resulting in a greater likelihood that someone will crack and add too much capacity. Another is that there are still benefits to be gained by having a larger network. And yet another reason is if you think someone's going to crack and add too much capacity, you want to be the one to do it so you have the largest slice of the revenue pie in the end.

 

[JFK777]

What would UA LHR landing rights be worth. Delta is almost at the BK court's doors, it can really bid. NW or CAL would love those rights but are they worth much more then the $400 million Pan Am got from UA in 1991? Given how much red ink has flowed from the airlines recently I doubt any smashing bids would be realized.

 

[SVQLBA]

On the "excess capacity" issue ...

I would believe that there was "excess" capacity in the industry if all the airlines were flying at 55% load factor. However, with the exception of Southwest, they are all flying at around 80%, something that previously was thought impossible and is basically "full". When was the last time you had an empty seat next to you on flight? I think mine was the last time I had a Saturday am departure ... to Mobile AL.

At 80% l.f., there is still lots of unsatisfied demand out there, and jetBlue and SW see this.

It is worth reading this Herb Kelleher interview

Herb Interview

(registration may be required)

Though much of the interview is aimed at non-airline folks, Herb is still right on the money in all areas, from customer service, to planning, to employee relations and compensation. One thing he says is "When we get a load factor that gets into the 70 or 75 percent range over an appreciable period of time, we don’t increase fares. We add flights and put additional seats in". You can bet your money, that this is the approach JB and SW will take to the current market, and it's the correct one.

As someone else said on this thread, current yields are not a result of too many seats -- it's the result of the influence and pricing power of the LCCs.

Once the legacy carriers accept this, stop trying vainly to ratchet up fares based on load factor or constraining supply, and instead focus on delivering service valued by customers at prices in line with that value, then the legacy carriers will start getting out of the woods.

 

[FWAAA]

The point several are making is that load factors by themselves tell nothing about whether there is excess capacity; just like they tell nothing about profitability.

Plenty of pax are being flown all over the country on fares that are less than profitable - if industry capacity were suddenly reduced by 20% (say by the shutdown of UAL or AA), the survivor would immediately see an increase in its share of the profitable full-fare and high-yield pax. The L and N fares don't have to be flown anywhere by anyone - they could just stay home.

The increased share of the shrinking full-fare pie would not necessarily mean that the survivors would be assured of salvation, but it would keep the game going a few more years (while the LCCs struggle to grow enough to take away the survivors' gains).

 

[boeing787]

Love all your comments about UAL failing. Just one problem...ain't gonna happen. You might as welll not even count on it.