Too much capacity.

[brokenwrench]

If you say it enough it must be true right. To much capacity, to much capacity, to much capacity. The problem is that today, major airline systems are reporting in with 80%+ load factors, which means airplanes are essentially full. That's certainly not an indication of "over-capacity." That means that if there is a meaningful reduction in capacity resulting from a merger, it would limit the "product" for sale, and, according to theory, allow carriers to carry fewer people, but at higher fares.

Sounds good, but not only is it detrimental to competition, but it's also sheer nonsense. In fact, past mergers have done little or nothing to reduce seats in the high-density markets where "over-capacity" supposedly exists. Even the GAO found this. But they have done wonders to eliminate capacity and competition at smaller airports.

 

[FWAAA]

As BoeingBoy has posted before, there is certainly too much capacity among high-cost, full-service airlines (the legacies) and too little capacity among the no-frill, low-cost airlines (like WN, B6 and the other true LCCs).

So the LCCs are growing like gangbusters (with hundreds of new airplanes on order) and the legacies are slowly shrinking (with very few airplanes on order).

Load factors have nothing to do with whether there is too much capacity; yield management will do their best to maximize revenue working with the hand they are dealt. For several years now, that has resulted in massive losses among the legacies because the excess capacity has driven fares below break-even. Only very recently has that begun to turn around.

Load factors only tell you how many seats the airline was willing (or able) to fill. In the profitable mid-1990s, most legacies reported load factors ranging in the mid-60s to low 70s, and nobody thought there was too much capacity then.

Legacy employees as a whole would have been much better off had UAL or USAir simply gone out of business in 2002. The others could have then sold their seats for more money, lessening the need for everyone to suffer massive pay concessions. But NO, rather than throw some overboard so that others might survive relatively unscathed, the bankruptcy process allowed all to remain in the lifeboat so that everyone would go hungry. For the individuals still employed at UAL or USAir who think a job paying much less than before is better than leaving the industry for greener pastures, they are indeed better off.

It will be a great debate for many years to come: Is it better that the weak die off or is it better that everyone have their pay whacked?

 

[Charlie_Tuna]

It will be a great debate for many years to come: Is it better that the weak die off or is it better that everyone have their pay whacked?

I think it is better to raise ticket prices and give hefty raises. But I am biased

 

[FWAAA]

I think it is better to raise ticket prices and give hefty raises. But I am biased

I agree with you that raising ticket prices would have been preferable to the current situation. And having paid attention in economics courses many, many years ago, I'm somewhat confident that had UAL and USAir simply gone out of business (had the weak died off), the surviving legacies would have had an easier time raising ticket prices in 2002 - 2005.

Problem was, that pesky glut of high-cost legacy seats.

 

[X-U]

Why are you targeting US And UA specifically? Why not CO during their bankruptcies or HP during theirs?

 

[BoeingBoy]

Why are you targeting US And UA specifically? Why not CO during their bankruptcies or HP during theirs?

Not to put words in FWAAA's mouth (keyboard???), but I suspect for two reasons.

- It would have made little or no difference in the current situation if either or both CO and HP had liquidated in their bankruptcies. Legacy carriers have traditionally shown little reluctance to adding capacity during good times, and the 90's were good times. BTS online data only goes back to 1995, but between Jan 1995 and Jan 2001 the industry added almost 11 Billion seat miles domestically. Take away CO and/or HP and those seats would have probably been added by the others.

and

- The low cost carriers weren't nearly as big a factor then as now - large portions of the country didn't have access to them. TTake away the availability of low cost seats from large portions of the market and the high cost seats become all that's available and fares set accordingly.

Only time will tell if the legacies have really learned to exercise restraint when it comes to capacity. If times stay good, will they be able to resist adding capacity (which could become excess capacity when times turn bad) or will they be willing to sit by and watch the lcc's add capacity. Of course, the pain the legacies (and especially their employees) have gone thru the last few years has resulted in the cost playing field being less tilted than in the past.

Jim

 

[insp89]

As BoeingBoy has posted before, there is certainly too much capacity among high-cost, full-service airlines (the legacies) and too little capacity among the no-frill, low-cost airlines (like WN, B6 and the other true LCCs).

So the LCCs are growing like gangbusters (with hundreds of new airplanes on order) and the legacies are slowly shrinking (with very few airplanes on order).

Load factors have nothing to do with whether there is too much capacity; yield management will do their best to maximize revenue working with the hand they are dealt. For several years now, that has resulted in massive losses among the legacies because the excess capacity has driven fares below break-even. Only very recently has that begun to turn around.

Load factors only tell you how many seats the airline was willing (or able) to fill. In the profitable mid-1990s, most legacies reported load factors ranging in the mid-60s to low 70s, and nobody thought there was too much capacity then.

Legacy employees as a whole would have been much better off had UAL or USAir simply gone out of business in 2002. The others could have then sold their seats for more money, lessening the need for everyone to suffer massive pay concessions. But NO, rather than throw some overboard so that others might survive relatively unscathed, the bankruptcy process allowed all to remain in the lifeboat so that everyone would go hungry. For the individuals still employed at UAL or USAir who think a job paying much less than before is better than leaving the industry for greener pastures, they are indeed better off.

It will be a great debate for many years to come: Is it better that the weak die off or is it better that everyone have their pay whacked?

FWAAA, There is another option to the "over capacity" problem. It's called Industry Consolidation.

 

[FWAAA]

Not to put words in FWAAA's mouth (keyboard???), but I suspect for two reasons.

You, sir, are more than welcome to do so, since you tend to say it better than I do. As others have said, a true gentleman.

I have to agree with both reasons you gave. I mentioned UAL and US simply because they were the first to file following the 2000 stock market bubble-pop and the September 11 attacks (which I credit with accelerating and exacerbating the legacies' problems, not as the sole cause).

AA and plenty of other airlines did their part to help trim capacity following Sept 11; Since then, AA has grounded more mainline planes than it acquired in the TWA deal. If I recall, US also grounded a lot of airplanes and furloughed many thousands of good people.

Problem is, the LCCs continue to grow and there are still too many high-cost seats competing for the ever-shrinking pool of fools (Like ME) who are irrationally loyal to one airline and are willing to give it higher fares than we should. If the current business expansion cycle had featured faster-growing travel budgets and a willingness to buy lots of F and last second Y, we wouldn't be having this discussion.

BB: Congratulations on your retirement - I forgot to post on that thread. Your employer's loss is our gain, as you'll have much more time to post. Mrs BoeingBoy may not agree, however. 🙂

insp89: Excellent point (very concise, as well, an admirable quality, which I don't possess) and I agree completely - I've been trumpeting the benefits of consolidation for quite a while. We have far too many high-cost hubs offering far too many high-cost seats. We don't need five or six airlines offering first class seats from PHL to LAX or MSY to SFO (most requiring connections, of course). IMO, effective competition can occur with two or three competitors instead of five or six.

 

[traderjake]

But NO, rather than throw some overboard so that others might survive relatively unscathed, the bankruptcy process allowed all to remain in the lifeboat so that everyone would go hungry. For the individuals still employed at UAL or USAir who think a job paying much less than before is better than leaving the industry for greener pastures, they are indeed better off.

I'm suppose to fall on the sword so you don't have to take a paycut?

I don't think so.

What did you ever do for me?

 

[qwerty]

Ironic that had US or someone else "fallen on the sword", most airline employees would be in a much better position today.

The excess capacity in the hub and spoke system is probably the last major piece to the profitability puzzle for legacy carriers. Do we really need 6 options from ORF to LAX? Once consolidation allows a couple of nationwide carriers to set profitable fares, then maybe we'll see them really compete on service, meaning good, well compensated employees and a return of meaningful amenities....or RyanAir, unfortunately.

 

[jimntx]

Once consolidation allows a couple of nationwide carriers to set profitable fares, then maybe we'll see them really compete on service, meaning good, well compensated employees and a return of meaningful amenities....or RyanAir, unfortunately.

Consolidation will NOT reduce capacity nor "allow a couple of nationwide carriers to set profitable fares." Consolidation at this point will only reduce the number of targets that the LCCs have to shoot at. It's part of the natural evolution of the travel industry.

In every mode of transportation in history, the first to use it (with the exception of walking ) have been the well-to-do--from camel caravans to stagecoaches to trains to busses to airlines. Prices were high in relation to the average wage in society, there were lots of "amenities" and pampering of the well-to-do customer.

As time went along and technology made the particular mode of transportation more available to the "common man" people stepped in to offer the service with less amenities, but the same mode of travel/elapsed time/destinations as before. It's what is happening again.

Within a few years (I think, less than 10), air travel in general will be nothing but transportation from point A to Point B. Passengers will, as a matter of course, pack a sack lunch to eat on the trip. SWA, JB, and others of that category will rule the sky.

The problem for those of us in the "legacy" category is that we have not managed expectations the way that SW and JB have done. The SWA passenger EXPECTS nothing but transportation from Point A to Point B. Herb has been very careful over the years to make sure that the message his advertising puts out promises you nothing other than transportation and a low fare--not the lowest fare, a low fare.

We seem to continue offering the customer "an experience." The problem then arises that the customer is all for having an experience, but they want it at the same or lower fare than charged by SW! Now, we may still be around 10 years from now, but we will be flying in the no-frills, transportation from Point A to Point B mode, but with very disgruntled passengers who will still be expecting an "experience" because they are on American Airlines.

Case in point...last night I was working a flight from Love Field in Dallas to St. Louis. It's an hour and 15 minute flight departing at 2000. Halfway through the flight a coach passenger asks me, "Aren't you going to serve any food on this flight?" (In a somewhat incredulous, leaning toward nasty, tone). When I said no, he said "Well, I could have just flown SW and saved some money." The fact that our fares on that route are equal to or lower than SWA is of no consequence to those passengers because they BELIEVE that SWA is cheaper.

 

[qwerty]

The LCC's will never "hub" to the extent of an ATL or a DFW, and there will always be a need for that kind of system. WN is encouraged that a combined US/DL will give them the opportunity to make inroads in the fortress hubs, simply because their low hanging fruit has now been picked clean.

Consolidated legacy carriers will be able to compete effectively, some would argue they'd drive the LCC's out of business eventually. It's all about having the size and scope to set the fare.

Giving away share is certainly a valid point, but I'll make my argument again: do we really need the option of NW, DL, AA, CO, US, WN from ORF to LAX? And if (the new) DL can offer the same service over ATL, they don't need to run planes from either city to PHL/CLT and PIT, except where the local O&D supports it. There is over capacity in this industry, and only by growing bigger and absorbing the alternatives will the legacies be able to compete.