USA320Pilot said:
In my opinion, legacy carrier capacity reduction will only provide limited short-term benefits to those companies remaining following a business enterprise failure because of the huge pending LCC growth. LCC's will back fill the capacity reduction, thus pricing power will not return -- ever.
People primarily shop on one point: price. That's true for all goods and services, including airfares.
Then please explain the success of the following:
1. Nordstrom's - very high end retail
2. SUV's - who needs a $50K Hummer when they can by a $9K Hyuandai? And yet, I'll bet Hummer, and the SUV market in general, is growing much much faster than "economy" cars.
3. W Hotel (and other "boutique" hotels) - huge growth market in that industry right now.
People shop primarily on VALUE. Sometimes, you can convince people that they get more VALUE at a higher price (I.e. a helpful salesperson, an added feature, or more convenient location, etc). Airlines are no different... Southwest has very loyal customers because it has a better value proposition for its customers than many other airlines.
That said, I agree that a shakeout will only have a short-term positive impact, if you assume everything else is equal. Of course, we know that everything else will not be equal. In my world view, the shakeout will occur in such a way that some capacity will be replaced, but not all of it... The number of hubs, and size of them, has been shrinking for the past 10 years... BNA, RDU, MCI as hubs are gone. Airports with competing hubs, like DFW and DEN, have lost one. Marginal hubs like STL, PIT, and SLC have been "right-sized", and true hub airports have been made more efficient, both from a scheduling and a facilities point of view, like DTW, ATL, DFW, DEN. So the trick for the industry is to find a new equalibrium, between the capacity which will be added and the capacity which will be reduced... It seems clear that less hubs are part of the new equalibrium.
Let's take an example... BGM - Binghamton, NY. US Airways recently reduced capacity on BGM-PIT to 0. Probably a good move. Meanwhile, Delta added CVG-BGM. So you could say that Delta replaced US Airways' capacity.... but, wait, there is more... US Airways pulled down what had traditionally been a schedule of 4 flights/day... Delta only added 3. US Airways had been known to fly mainline equipment to BGM (until recently), DAL does not. Thus, some of the lost US Airways capacity was replaced by a competitor, but not 100% of it.
Next, BGM-CVG is arguably better than BGM-PIT, because the CVG hub offers more connections to more places than PIT did. CVG has flights to PDX, COS, ATW, and LIT, which US Airways never provided from PIT. So not only is there less capacity from BGM, but it is better allocated to a larger network.
So, in the event that a major airline fails, I expect to see capacity changes like this... Where 100% of the lost capacity is not replaced... Particularly in smaller markets. And overall, the industry will find a new equalibrium... Or at least a more stable world in which to reside (i.e. closer to equalibrium than today). The current airline environment is simply unsustainable.
