Friday, October 22, 2010

Airlines Making Money ... And Adding Some Capacity

[Chart shows 4th quarter scheduled domestic capacity, from BoydGroup International. Codes that aren't obvious include AS, Alaska; B6, JetBlue; F9, Frontier; WN, Southwest]

The media echo chamber has been resounding with the conventional wisdom that airlines have cunningly reduced capacity, even as the news firms up that airlines have become solidly profitable -- at least for now, and at least partially because of those $8-plus billion in extra fees for checked bags, changes to itineraries and other things that the industry will jack up customers on this year.

But, as Mike Boyd has been pointing out, it ain't necessarily so that capacity is down across the board.

"--September 2010 OAG (Official Airline Guide) schedules database indicates that airlines, worldwide, will offer 8% more, or an additional 22.6 million seats, in September 2010, as compared to the same month a year ago. The number of flights will increase 6%, to a total number of 2.6 million scheduled flights operating in September 2010, an increase of 151,257 over last year."

Meanwhile, the International Air Transport Association recently revised its 2010 industry outlook, now projecting an $8.9 billion profit, up from its originally forecast $2.5 billion in June, but predicting profitability will drop to $5.3 billion in 2011.

"What has caused this improvement? The first factor is careful capacity management," said the IATA director, Giovanni Bisignani. "Demand improvements have been very strong. Already traffic is 3-4 percent above the pre-recession levels of early 2008. In July, premium traffic was up 13 percent," he said, adding: "Unfortunately it is still 8 percent below pre-recession levels."

"Over the full year, we expect global demand to expand by 11 perdcent and capacity by 7 percent. The tighter supply and demand conditions are boosting load factors. The average load factor for January to July was 78% globally. With that, airlines are getting some pricing power."

Meanwhile, Richard L. Aboulafia, an analyst at the Teal Group, notes that airlines have trimmed capacity by grounding planes, reducing the number of flights they offer between cities and flying smaller planes.

At seven percent, last year’s capacity cuts were the deepest since 1942, as demand for air travel plummeted. And while the airlines have reversed some of the deepest cuts this year, they have not kept up with the growth in demand, he said.


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