Overcapacity

[usairways_vote_NO]

If a dinosaur airline executive claims the sun is shining, you better bring an umbrella.

Whether it be due to stupidity or dishonesty, the latest excuse for the dinosaur airlines' financial disaster fails to stand up to a factual examination

The Overcapacity Excuse (and others, too)

Neither Labor nor Fuel is the Problem, Either

Let's look a bit further. The other two common excuses recently offered by dinosaurs to explain their losses are high fuel costs and high labor costs. Are these any more real?

Some interesting insight was exposed in the second US Airways bankruptcy filing in mid September this year. In their filing, they disclosed that their overall operating cost per available seat mile, excluding fuel, in the first half of 2004 was 10c a mile.

Compare this to a former dinosaur that transformed itself - America West. They paid 7.3c a mile. JetBlue pays 6.4c and Southwest pays 5.7c.

What does this tell us? It clearly shows that even after ignoring fuel costs, a dinosaur airline such as US Airways (admittedly one of the worst) has way higher costs than more successful airlines.

Now, let's continue the exercise and take out the labor costs. This shows US Airways had a cost, excluding fuel and excluding labor of 5.8c a mile. America West's cost is 4.7c, JetBlue is 3.8c and Southwest is 2.7c.

Two conclusions :

First, if everyone at US Airways worked for free, the airline's operating costs are still higher than what Southwest pays, including Southwest paying full labor costs!!!

Second, if we exclude labor and fuel from all four airlines, and look at the remaining costs - which in a grossly oversimplified manner can be considered to partially represent how well the airline is managed, US' costs are 23% higher than America West, 53% higher than JetBlue, and more than double the costs at Southwest, its new head to head competitor.

What does that leave as possible explanation for this amazing discrepancy? There are a number of factors, but they all fall under one umbrella statement - bad management.

Do you now see why the unions are reluctant to give still more money back to their employers? No amount of giving back is going to solve US Airways' problems. Labor costs are admittedly high, but the other costs are higher, both in absolute dollar terms and in percentage terms, than those at Southwest.

Summary

As long as management (USAirways?)blames over capacity, high fuel and high labor costs, they are ignoring a massive remaining factor and one which surely they have the most direct control over. Themselves.

 

[TomBascom]

To answer the question -- overcapacity is obviously a myth. Even most of the airline execs seem to have conceded that of late.

 

[jimntx]

Besides, if US Airways and United--and just for the sake of argument, let's throw in AA also--were to go out of business tomorrow, there would be "undercapacity" for only a short time.

1. Does anyone think that the remaining airlines would not move as quickly as possible to fly the routes that the missing airlines were flying? Oh yes, I'm sure the other airlines would ignore the enormous O&D in two suddenly unserved markets (ORD & DFW).
2. Who among you believes that GECAS would take all those returned a/c and park them in the desert to prevent a reoccurrence of the ""overcapacity" problem? GE would be making deals so fast it would make your head swim.
3. Some airlines that are strictly domestic today would look at those Atlantic and Pacific routes that the 3 failed airlines used to serve, and I bet they would re-think their devotion to the domestic market. SW might not start flying to Peking as SW--but I bet they would locate airplanes so that their ATA subsidiary could do it for them.

Training staff would not be a problem. There would be a huge pool of trained pilots and f/as to draw from, and I bet there would be a quick bill through Congress that would temporarily exempt the survivors from current "train from scratch regardless of trainee's background" rules. We couldn't let AF, KLM, BA, LH, Singapore, and Qantas move in to fill that void, now could we?

 

[JS]

You can't just compare operating costs between two airlines and proclaim the difference to be entirely bad management.

There's no doubt that US management has sucked for a long time, but that isn't all. Consider:

US has many short-haul flights; B6 flies mostly long-haul
US has many flights in the Northeast; HP has very few, and WN has few, most of which are not in the high-cost airports DCA, LGA, and BOS (just PHL)
US serves a lot of small airports (small planes carry higher costs per seat); WN and B6 do not, and HP serves few
US has international flights; WN does not, and B6 and HP have few

For US, some of these cost disadvantages are offset by higher revenue (e.g., flying out of LGA rather than ISP), but the bad management and lazy employees in certain locations certainly makes it more difficult to survive under these conditions.

 

[funguy2]

1. I believe there is significant industry overcapacity.

2. This author seems to not have a clue:

"perhaps there are 1500 seats a day on flights between Des Moines and Omaha, but perhaps, on average, only 1200 people a day fly between these cities."

As far as I can tell, there are 0 flights between Des Moines and Omaha, and therefore, likely very little demand... At least pick a better example!

Also, "Compare this to a former dinosaur that transformed itself - America West. They paid 7.3c a mile."

America West is not a "former dinosaur". AWA has always had very low costs. The only thing that has changed recently was its fare structure... Not its cost structure. Again, lack of research on the author's part.

3. The rebuttal to the "excess capacity myth" is that airplanes are fuller than ever - which is true. However, because there are too many seats chasing too few customers, the planes are full because airlines have to lower their prices to unprofitable levels to fill them. Simple Econ 101. High supply + Low Demand = Low Prices. We know that, in part, low fares are fueling the record loads.

3. Another rebuttal to the "excess capacity myth" is the hundreds of aircraft orders placed by the LCC's... The author takes no consideration the the fact that LCC's by their very design, must grow to keep costs down - growth keeps average seniority low, for example, which keeps average pay reasoably low (without concessions).

Also, some schools of thought seem to go like this: There is oversupply in the "legacy" (or by this author's designation "dinosaur") segment of the industry, and potentially undersupply in the "LCC" segment. This could have something to do with America West's fare structure change, and DAL and UAL's attempt at entering the LCC market with Song and Ted, respectively. A point completely missed by the author.

4. The author does get some things right. We do not live in the .com '90s anymore. Pricing, and price shopping between carriers, is a lot different today then a few years ago. However, these do not mean that there is no oversupply.

5. Another point missed by the author is that airlines generally find it easy to add capacity and difficult to remove it. The history of deregulation shows that large capacity reductions only occur with catastrophic airline failures... Where planes suddenly stop flying and the airline closing its doors makes national news. When you look at it from that light, when there is an economic downturn, there is no way to not have over-capacity, if you assume that capacity met demand during more robust economic times.

6. I do think that "over-capacity" may be a bad term to use. The problem is less "over-capacity" and more that at the current supply and demand points, most companies cannot operate profitably due to a combination of unprecidented fuel costs and unprecidented (low) fare levels. The term "over-capacity" seems to be an indication by the industry that if there were less capacity, there would be more pricing control, and more likely to be profits. That may or may not be true.

And those were just the off the top of my head comments.

 

[Borescope]

The term "over-capacity" seems to be an indication by the industry that if there were less capacity, there would be more pricing control, and more likely to be profits. That may or may not be true.

[post="257490"][/post]​

By your own math equation....Simple Econ 101, Higher Prices=Less Supply + Demand. We're seeing this in the cost of oil with China, India, and other developing nations. If there were a sudden drop in capacity, such as airlines closing their doors we would see pricing power back in the remaining airlines hands. Of course this may be short lived as we all know that the remaining airlines would quickly move to fill the void left by their fallen bros.

 

[TomBascom]

Just like with China, India and so forth there is plentiful, but price sensitive, demand and there is plenty of supply with more coming.

Airlines going out of business won't result in increased pricing power. Short lived or otherwise.

The legacy airlines created high "business" fares through artificial scarcity and fooled themselves into believing that it was sustainable. The emperor as no clothes and there's no way that the old robes can be put back on.

 

[funguy2]

By your own math equation....Simple Econ 101, Higher Prices=Less Supply + Demand. We're seeing this in the cost of oil with China, India, and other developing nations. If there were a sudden drop in capacity, such as airlines closing their doors we would see pricing power back in the remaining airlines hands. Of course this may be short lived as we all know that the remaining airlines would quickly move to fill the void left by their fallen bros.

[post="257500"][/post]​

That is true... But then you have to see paragraph 2 of point 3:

Overcapacity for legacies? Yes
Overcapacity for LCC's? Maybe. Maybe not... particularly if there are less legacies.

 

[KCFlyer]

As far as I can tell, there are 0 flights between Des Moines and Omaha, and therefore, likely very little demand... At least pick a better example!

[post="257490"][/post]​

True enough...especially since those two cities are about a 2 hour drive apart. If there really were 1500 seats available, that would mean there would be about 100 B-1900's flying between the cities every day.

 

[KCFlyer]

Hmmm 1,500 seat equals how many turd brown and toilet bowl blue buses? My calculator is broken.

[post="257584"][/post]​

About as many of those as their are F class seats for your royal hiney, bob.

 

[usairways_vote_NO]

Hmmm 1,500 seat equals how many turd brown and toilet bowl blue buses? My calculator is broken.

[post="257584"][/post]​

Why are you so jealous of Southwest? That has to be the reason since you continually call them names for apparently no other reason.

 

[KCFlyer]

Why are you so jealous of Southwest? That has to be the reason since you continually call them names for apparently no other reason.

[post="257587"][/post]​

IT's because Southwest won't kiss his butt. On Southwest, a VFF might get a companion pass, but they still treat the first time customer just like they treat the VFF. And Bob can't take being treated as "just another traveller".

 

[Bear96]

IT's because Southwest won't kiss his butt. On Southwest, a VFF might get a companion pass, but they still treat the first time customer just like they treat the VFF. And Bob can't take being treated as "just another traveller".

[post="257613"][/post]​

Y'know, this makes a lot of sense.

I have long wondered about Bob's strange obsession with WN. But I never considered it in light of his craving to suck every ounce of energy out of everyone around him in his never-ending quest for attention. (Look at me! Look at me! Over here!)

U apparently has decided to keep him entertained and flattered (for some reason or other) by throwing him a bone every so often by making him think FFOCUS matters. WN realizes doing something like that is a drain and a distraction from running a profitable company, and realizes that people like him are not really worth the trouble. So they have the audacity to treat attention-hungry people like that the same they do everyone else.

Maybe that is the root of his hatred of WN. They simply won't respond to such egotistical temper tantrums the way U does. (Which of course only serves to make the egomaniac even MORE maniacal and spend endless hours trashing WN on the internet. Kind of a vicious cycle.)

Or maybe it's much simpler. WN realizes that when you are only willing to pay a cheap fare, you only get cheap service. On the other hand, Bob has come to expect regal service for that same cheap fare (or really, for an even CHEAPER fares, as he keeps on pointing out). He can't stand the idea of only getting what he is paying for.

Unfortunately for him, that business model is about to come to a spectacular, crashing end.

 

[WNjetdoc]

You guys are rough on poor little "Bobby", he is insecure and feels that SWA is to blame for his airlines poor performance. One needs to only look into a crystal ball and see that Crystal City is where most of the problems have started with U.

However I think you have to look deep, very deep into that crystal ball to see what it will take for U to "get right".

 

[mweiss]

Unfortunately for [PineyBob], that business model is about to come to a spectacular, crashing end.

[post="257617"][/post]​

I'm going to miss it when it's gone, too. Ahh, well, it's fun while it lasts, eh?

I'm with funguy2 on this one. In economics, overcapacity is indistinguishable from overly high costs. As such, there is probably overcapacity in the sense that the market equilibrium price is below the costs of the legacy carriers.

If US and/or UA were to cease operations today, there would be a short-term increase in fares resulting from the temporary reduction in capacity. However, it would be followed in short order by capacity increases (yet again), until we return to a market with little enough capacity to remain profitable for most LCCs. That same market would remain unprofitable for whatever legacies remained.

If your business is not a cost leader, the only way to survive in the market is to offer a higher-end product, and convince a sufficiently large demographic that the higher-end product is worth the extra cost. Cutting service to the bone does not lead down that path.