Yesterday joe said,
Is domestic capacity ever going to increase, even a little?
The economy is relatively strong, certainly compared to the past several years. More people are flying. But the number of seats in the air hasn’t kept pace.
- This means planes are full.
- That drives up the price of tickets
- And makes award tickets harder to come by.
“Capacity discipline” began with the Great Recession. With airlines losing billions of dollars they faced extreme crisis. Passenger counts were shrinking and so airlines managed to shrink seats.
At the same time there were fewer passengers, their costs were higher, fuel was at historic highs and that represents one of the three major expenses of an airline (aircraft and labor being the two other largest).
Airlines haven’t made money historically over long periods of time. It’s a capital intensive, highly regulated, and heavily unionized industry. There are few barriers to entry (for domestic competitors) except at a handful or airports. And it’s highly cyclical.
The old Warren Buffet line rings true: the quickest way to become a millionaire, historically, was to start out with a billion dollars and invest in an airline.
- The appetite to invest in airlines seemed limitless, despite the historically poor returns.
- There’s always been a group of investors who believed what was really needed was a new airline, usually based in the city in which they happened to live.
- Existing carriers seemed to think they were in battle rather than business, they’d throw capacity into markets to drive each other out regardless of the financial consequences.
And yet somehow the historical pattern hasn’t held in recent years. Some people will blame it on mergers, but in many ways it’s the capacity discipline that has helped to drive the mergers as much as the other way around.
The biggest exception has been Virgin America, which since inception has lit money on fire entering markets and driving down prices. But its route network is limited, and in most recent times even it has done better and priced closer to pre-existing market.
So, is domestic capacity ever going to increase?
According to my crystal ball, if fuel prices remain low then yes — at least one airline will experiment growing capacity believing that new routes and extra flights can be profitable with a lower cost structure in place.
And if one airline does, others will follow. That will drive down prices.
What points to this is:
- Decent economic environment
- Lower costs
- Historical behavior in the industry
The airline industry has always been cyclical, it would be unwise to bet that these patterns have changed, that we’ve reached ‘the end of history’ in commercial aviation in the United States.