Overcapacity

[usairwaysfan]

As a USAirways fan, I am thrilled with the merger for the employees and the customers. I have been reading many articles describing the benefits as well as the challenges of the merger. All these things are very interesting to me.

Many analysts are saying that this merger will not address the problem of overcapacity in the industry. "Too many carriers are offering too many flights." OK...this is true. However, it seems to me, that not one analyst has pointed to where the largest growth in flights is coming from: low cost carriers. They are the ones buying planes and flooding markets. The legacies are trying to grow where they can without buying planes by utilizing their existing fleets more efficiently. This is something that the LCCs have been doing for years.

Granted...the LCCs are making money and the legacies aren't. I understand that. If a legacy airline goes under, it will only take a few years for the industry to be back where it is now with overcapacity. When will it end?

 

[MarkMyWords]

Aviation cycles. Once the Mature carriers morph to the new and improved low cost carriers or die on the vine, there will be a new strain of low cost carriers that will pop up and challenge the likes of B6 and WN. Look at the legacy carriers lost in the late 80's and early 90's. Now the likes of US, DL, UA seem to be taking the same path as Eastern, Braniff, TWA while up and coming airlines like WN started to mature. B6 and FL will be a thorn in the side of WN as she ages. It seems like economic factors either speed up the aging process or help delay it.

 

[usair_begins_with_u]

Mark My Words:

Damn, I had to read your post twice because I thought I was reading my own writiing.. You are 100% correct.

Nothing is going to change the airline industry except for re-regulation. These HP/US polyannas fail to recognize that the sum of their reduced parts is not a guarantee for success. Over capacity, internet pricing, high fixed costs, low variable costs, and low switching costs will lead to excessive competition in the long run. The HP/US merger does nothing to address any of these market failures.

Ask warren buffet about airline stocks...

 

[Art at ISP]

If the merger results in a well-run full service airline with RATIONAL pricing ala HP's current scheme, it will succeed and be a major force in the industry's future. It will take some fine tuning, but overall, the ingredients are here for a profitable well run airline, with fair pricing and amenities for frequent travelers.

This could just be the beginning of a bright future for the new US Airways..

 

[usair_begins_with_u]

the ingredients are here for a profitable well run airline

What are the ingredients?

 

[Art at ISP]

1. The right (or close) route structure
2. Intelligent capable management who knows how to and wants to run an airline
3. Acceptable compromise between amenities and economies
4. RATIONAL and SIMPLIFIED fare structure
5. The best employees in the business

And that's just the beginning.

 

[BoeingBoy]

Art,

Not to be pessimistic, cause I hope this works, but there's one ingredient missing from your list that probably belongs at or near the top before we can call this a success:

0. A cost structure that produces a profit competing against the likes of WN, B6, etc.

Hopefully, your #2 can achieve that without too much pain for the employees.

Jim

 

[coolflyingfool]

When you talk of overcapacity, it is the likes of SWA, Jetblue, and Airtran that are adding new planes, cities and routes to the market. In business there is a saying to the affect of if you are not growing, you are dying. I would be willing to bet that the 3 above mentioned carriers have added more planes to their fleets since 9-11 than all the other US majors combined. There will come a day though, that the shoe will be on the other foot for those LCCs. Just my thoughts............

 

[AirplaneFan]

As a USAirways fan, I am thrilled with the merger for the employees and the customers. I have been reading many articles describing the benefits as well as the challenges of the merger. All these things are very interesting to me.

Many analysts are saying that this merger will not address the problem of overcapacity in the industry. "Too many carriers are offering too many flights." OK...this is true. However, it seems to me, that not one analyst has pointed to where the largest growth in flights is coming from: low cost carriers. They are the ones buying planes and flooding markets. The legacies are trying to grow where they can without buying planes by utilizing their existing fleets more efficiently. This is something that the LCCs have been doing for years.

Granted...the LCCs are making money and the legacies aren't. I understand that. If a legacy airline goes under, it will only take a few years for the industry to be back where it is now with overcapacity. When will it end?

[post="271739"][/post]​

How can one say that there is "over capacity" in the industry? All airlines report very nice load factors. There is only an "overcapacity" problem if one means by that phrase that hub-n-spokes can't set prices like they did 6 years ago. However, the LCC's are making money at these capacities and will continue to add capacity.

 

[Busdrvr]

How can one say that there is "over capacity" in the industry? All airlines report very nice load factors. There is only an "overcapacity" problem if one means by that phrase that hub-n-spokes can't set prices like they did 6 years ago. However, the LCC's are making money at these capacities and will continue to add capacity.

[post="271844"][/post]​

There is overcapacity of AVAILABLE lift. Businesses produce when revenues exceed marginal cost. The marginal cost for a major is putting an airplane you already own or underutilized back into the market.

As to you belief that the LCC's are making money at the current levels, WRONG. Of the established carriers, only SWA has proven to be consistantly profitable, and that profit is due to INVESTMENTS. The LCC's keep cost low by growing, when growth stops, their cost will go up, and they will have the same problems as the legacies, without an international route structure to fall back on.

 

[mrman]

There is overcapacity of AVAILABLE lift. Businesses produce when revenues exceed marginal cost. The marginal cost for a major is putting an airplane you already own or underutilized back into the market.

As to you belief that the LCC's are making money at the current levels, WRONG. Of the established carriers, only SWA has proven to be consistantly profitable, and that profit is due to INVESTMENTS. The LCC's keep cost low by growing, when growth stops, their cost will go up, and they will have the same problems as the legacies, without an international route structure to fall back on.

[post="271854"][/post]​

This Investment thought is why the legacy's don't get it. Fuel hedging is not an investment or bet. As in agriculture, hedging allows one to guarantee and plan their cost. WN knows their fuel costs for the next multi years. With this knowledge in the pocket it does not matter if fuel goes up or down. They have planed and set pricing for the KNOWN factor. The Legacies can't plan for their fuel costs because they don't know what there costs will be tomorrow or five years down the line

 

[TomBascom]

There is overcapacity of AVAILABLE lift.

No there isn't. The industry can fill each and every seat.

They just can't do it at prices that legacy carriers find profitable.

Demand for air travel is going to increase dramatically. There's plenty of demand and no shortage of supply and that isn't going to change.

The only over capacity is an over capacity of over priced seats. The old game of creating an artificial scarcity to support gouging has failed. Adjust or die. US & HP are adjusting. Hopefully they have enough of a head start on the rest...

As to you belief that the LCC's are making money at the current levels, WRONG. Of the established carriers, only SWA has proven to be consistantly profitable, and that profit is due to INVESTMENTS.

As if there's something wrong with that? Is it immoral or something that they've had the good sense to plan for their future? If the profits were coming from on-board peanut sales they would still be profits.

 

[LGA / 037]

In my opinion the overcapacity will be reduced when DL falls on their own sword ! They gambled the house on UAIR going out of business in the short term and lost ! They have already admitted they may NOT even qualify for Chapter 11 and instead be headed for Chapter 7 ! Even if their Chapter 11 attempt succeeds it will just only do away with another pilot pension plan ( which is big ) but wont be enough ! Damn, they gambled on the power of US failing and we hooked up with an Airline with a hub in LasVegas ! $$$$$$$$$$$$$$$$$$ 777

 

[Busdrvr]

No there isn't.  The industry can fill each and every seat.

They just can't do it at prices that legacy carriers find profitable.

Demand for air travel is going to increase dramatically.  There's plenty of demand and no shortage of supply and that isn't going to change.

The only over capacity is an over capacity of over priced seats.  The old game of creating an artificial scarcity to support gouging has failed.  Adjust or die.  US & HP are adjusting.  Hopefully they have enough of a head start on the rest...
As if there's something wrong with that?  Is it immoral or something that they've had the good sense to plan for their future?  If the profits were coming from on-board peanut sales they would still be profits.

[post="271878"][/post]​

Let's go over this again, this time more slowly so you can understand. Businesses produce when MARGINAL revenue exceeds MARGINAL costs. If I have employees and jets that are being underutilized, the marginal cost is not much more than gas. If I have my current equipment maxed out, then the MARGINAL COST includes the purchase of new jets. When the "glut" of avail lift works itself out, prices will rise RAPIDLY.

As to SWA's hedges, nothing wrong with it, merely pointed out it is the singular reason they remained profitable, and not an advantage they can plan on in the future. When The legacies were trying to conserve cash while also trying to maintain large fleets of very expensive WB international jets, SWA bought hedges. they didn't have to continue to operate the international flights with no pax to maintain slot positions and "market share" for the future. As they say, better lucky than good. SWA would argue that the hedges allowed them to lock in fuel prices that they figured would allow them to remain profitable. I say B.S. If oil would have fallen to $10 to $15 a barrel, SWA might have been the only carrier losing money, as other airlines attacked them at home with cheap seats.

 

[Busdrvr]

In my opinion the overcapacity will be reduced when DL falls on their own sword ! They gambled the house on UAIR going out of business in the short term and lost ! They have already admitted they may NOT even qualify for Chapter 11 and instead be headed for Chapter 7 ! Even if their Chapter 11 attempt succeeds it will just only do away with another pilot pension plan ( which is big ) but wont be enough ! Damn, they gambled on the power of US failing and we hooked up with an Airline with a hub in LasVegas ! $$$$$$$$$$$$$$$$$$ 777

[post="271881"][/post]​

While i understand your bitterness toward DAL, they won't be going chapt 7. If anything, they lose the debt and somebody would be merging that fortress hub and outstanding Euro network into it's airline....