If you’ve listened to airline executive speaks in recent weeks about financial results or their forecast for the industry, you’ve probably heard one theme more than any other — overcapacity (well, unless you’re listening to a Delta earnings call, in which case you probably heard ”premium”).
Continue reading: Unpacking The Airline Industry Overcapacity Narrative…
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The 2001 onwards era of capacity discipline ended in 2015, which afterwards airlines became a lot less profitable. Coincidence?
The harsh truth is that airline execs have gotten too greedy with capacity and they're now paying the price.
The answer is simply that post covid labor costs had to rise by large percentages due to inflation which the current administration fueled and there is too much capacity for the amount of seats at fares that have to be charged given those costs
Ooooh this is a fun game. Let me try!
"Oscar Munoz and Scott Kirby added lots of capacity and screwed themselves into severe performing financially while dragging down AA with them."
"Delta has been proven that it adds capacity at optimal levels and haven't suffered financially as proven by their stock prices going up $0.01 midday Tuesday"
"Delta is so generous with paying their employees so their numbers don't count while other airlines that also pay their employees so those numbers matter a lot more"
Great article Ben. Air travel is a low margin business. The inelasticicty of air demand is double edged. While airlines can cut capacity to raise prices, it’s dangerous to do so because some cheap startup can come in and grab that demand. They’ll then fail when they grow, but they’ll keep the majors down forever.
So now Deltas (temporary) financial underperformance is the fault of... Joe Bidens administration?
Say what you want about him, but businesses NEVER blame their problems on POTUS like that. Wall Street sees it right through, avoiding any responsibility and blame.
This is as close you'll see me get political Timmy. You're reaching and scraping the bottom of the barrel
Biz travel has increased, but the plateauing is harder and harder to dismiss with happy talk.
What gets less attention is how the percentage of affluent elders -- ages 65 to 75 or 80 -- has also not achieved pre Covid levels.
That's doubly bad news for the airlines as those two groups trended to fly at different days and times ... providing a somewhat steady and reliable floor for utilization.
It's nice to see the air travel industry not consolidate into a giant monopoly
I was speaking with former airline CEO and he told me that the business is awful mostly because when there are big events (COVID, 9/11, who knows what next) it just kills everyone. Very few businesses have to go through that level of rollercoaster.
Simple there was huge demand coming out of COVID in part to stymies, freebees, etc.-particularly for lower income people. Think you're a $15 an hour worker and the government hands you a few thousand to spend. In the interim because of all that demand flight crew wanted more money and for the most part, particularly pilots, got it.
Now all the freebees are gone and in it's place inflation. which hurts those same consumers that benefited from the sytmies. There's too much unprofitable flying and airlines should be grateful for the delivery issues or they'd have more seats to fill.
I see some fall out coming. Many not a bunch of Chapter 11s but layoffs, reductions and delay in deliveries.
VS CEO did an interview with the Daily Telegraph at the Farnborough airshow in which he said that they would be introducing a new SAF or “green levy” charge next year hinting at starting from an additional estimated £40 per ticket! More junk fees on fares coming and what with this perceived corporate collusion look forward to tweeks being made with the dynamic pricing algorithms.
What about airlines trying to make more money off miles than miles actually flown?
Last time I looked the inflation issue was global, and in some countries (example UK) was much worse than the US. Or is that also the current administrations fault? The US however is probably unprecedented in how much extra pilots and crew have recently been offered in raises in comparison to European airlines for example.
No wonder you love commenting on View From The Right Wing Tim. Blaming Biden for this is absolute insanity, especially given Delta's massively self inflicted wounds of being behind on fleet renewal, behind on premium product, massively behind on technology and only having the position they do because they manipulate fuel costs.
Eh, not really. The airlines "capacity discipline" was to run skeleton mainline domestic networks and employ regionals to run routes. The reality is that "capacity discipline" only worked in an era of no pilot shortages and lower fuel costs that allowed 50 seaters to work on CPAs. That "discipline" got airlines into bankruptcies and mergers.
Surely the main thing that's disrupted the industry is the absence of Business travellers. All these WorkFromHomers who think a Zoom meeting is "just as good" as a visit. There's so much pressure to believe it, it's become the truth. there's a great United ad (with Gene Hackman doing the Voice of God) from the 1980s in which a company head says "enough" and sends his whole sales team out on the road with a massive stack of paper airline tickets. Where carriers used to have to offer diverse schedules, to please the new York guys who wanted to arrive fresh in the morning in Tokyo and also please the New York guys who wanted to arrive in the afternoon, relax and sleep before the morning meeting. They don't need to offer that any more because the front is full of leisure travellers with no meetings, who upgraded at the kiosk, or elites who upgraded with coupons. It's a double whammy for the carriers, no longer getting the big bucks from schedule-sensitive travellers. Seems to me, it's a miracle the legacies can afford to fly longhaul at all.
Great blog and analysis, but please stop provoking TD (and the slew of commentators who think making a related name and sarcastic comment) with the whole Delta/premium stuff. It's driving us regular readers insane.
I would be interested in what all the new pilot and FA contracts (not to mention just higher costs for nearly everything but fuel) have done to profitability of different routes as well. My guess is the airlines don't so much as have an overcapacity problem, as just an imperfect mix problem. I am sure UA would be happy if they could only fly their most profitable routes, but at the end of the day they have to offer a mix to keep loyal pax coming back for all their different travel needs.
Good analysis. A trend I've noticed the last 12 months is how seasonal the north American aviation industry is. There are no issues filling planes at the moment (hence the impact of the IT outage last week) yet for 6 months of the year in winter airlines can't fill their planes.
The problem is their labour expects 12 months a year of salary, so how so airline retain staff when they don't need them all year round?
I feel that the situation in the US is different to what I am experiencing here in Australia, But amongst the numerous flights I have taken since the end of the pandemic (in all classes of service, almost every airline that flies to Australia and mostly international flights) I struggle to remember any flight that was not full.
Flying out on New Years Eve was memorable as the Emirates A380 was about 50% empty, but any other flight was very close to full, if not full, and priced at least 50% above pre-pandemic prices.
lmao "shoulda simply kept high unemployment so poor Ed Bastian had less egg on his face" really just takes the cake, i don't think it can be topped
Do you think the US President controls inflation in other countries too Timmy?
You deserve all the scorn and mockery you get for your mentally defecting rambling.
Thank you. It’s so annoying and immature but I guess it’s a business right and the goal is to drive up engagement to increase ad revenue.
That has always been the challenge with airlines: high fixed costs, high unionization rate, heavy govt regulation/taxes, and single digit profit margins. One accident or unknown issue can destroy an entire quarter's worth earnings.
The US has been running unprecedented govt spending levels since March 2020 while the Fed delayed the rise of interest rates. Joe Biden (and Sec Yellen) doesn't deserve all the blame for inflation, his administration's policies has been a contributor to the problem.
I think airlines may raise prices on specific routes. If there are many airlines offering that route or a lot of demand.
@N1120A - “ only having the position they do because they manipulate fuel costs.”
Ask anyone who works in the C-level in the energy sector about Delta’s benefit from its refinery and they all giggle. Delta overpaid for an outdated and run-down refinery, and they crow to Wall Street how smart they are…. those in the energy sector say Delta at best breaks even. But Timmy knows best.
bs. look up how much inflation got pumped by quantitative easing vs direct cash to end consumers/debt forgiveness. math is your ugly gf.
You can always fill a plane, the question is at what fares. Overcapacity in this context doesn't mean the planes are flying empty. It means they are flying for cheap. I was able to price EU-HKG-SIN-EU in J for 2200€ (yes, including the HKG-SIN segment, with stopovers in both HKG and SIN, thus covering trips to two cities). That just can't be profitable.
If air travel demand is price inelastic, then why do promo fares exist? Or more generally speaking: why does revenue management exist?
If you wanted your competitors to lower capacity, you'd actually signal on your earnings call that you were raising your own capacity.
Signaling you're lowing yours would have the opposite effect of the collusion you imply. It would convince competitors to not lower their capacity since your airline would be lowering it across the industry for them.
That's how these things would actually work.
Kirby is lying when he says demand is inelastic. It's simply not true. Perhaps business travel is inelastic (if it means making a million dollar sale, the cost of the tickets to send your reps over is probably insignificant). But leisure, VFR traffic is absolutely elastic. People put off vacations if it's too expensive, or choose different destinations, or decide to drive to something local vs fly somewhere further. Not to mention if a recession hits and people no longer have discretionary income.
The story of the post-covid era is reduced business travel being made up by increased leisure travel. Which means travel volume has become *more* elastic in the post-covid era than it might have been in the past.
And even business travel is now becoming price elastic. Doing zoom meetings has become much more normalized as a reasonable alternative. People now close massive deals having never met in person. So now the incremental value of sending your sales team to your customer site vs doing a zoom meeting has decreased, to the point, I bet, that large increases in travel costs can now tip the scales toward not traveling at all.
I'll be charitable and say Kirby is just using outdated analyses, in which case he really needs to re-assess his market as it stands today. In the worst case, he's simply making up lies to placate Wall St. who doesn't want to hear that if they raise prices any further, they'll sell less seats.
Honest question, do you have any data on this? I don't myself, but if I had to speculate I'd suspect the seasonality is mainly on the international routes, which, even in the Big 3 constitute a relatively small portion of their overall revenue and network.
Domestic travel I'd wager is fairly even. Summer vacation travel is balanced by winter travel by northerners taking a break from winter. There are school holidays and 3-4 day breaks spread fairly evenly throughout the year that people travel on. And that doesn't include business travel which can occur all year long.
Sure, international travel has a well-known seasonality, but even there, Europe-bound jets in the summer get re-routed to warmer climates in the winter, etc. So how much actual variation is there in the number of staff needed throughout the year? I'm not sure, but I'd be surprised if it's all that big.
As stated by Bob Crandell, former CEO of AA:
“I’ve never invested in any airline. I’m an airline manager. I don’t invest in airlines. And I always said to the employees of American, ‘This is not an appropriate investment. It’s a great place to work and it’s a great company that does important work. But airlines are not an investment.’”
I think Bob said it all!!