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”).
In this post I wanted to talk about that in a bit more detail. What does that term really mean to airlines, and what are the implications of the overcapacity narrative for consumers?
In this post:
We’ve gone from not enough planes to overcapacity
Once global travel meaningfully restarted after the pandemic, full service global airlines were on a roll, thanks to strong premium leisure demand and the “revenge travel” concept (as much as I hate that term).
Airlines may have only been operating at a percentage of their pre-pandemic levels, but yields were excellent, thanks to limited capacity. Of course as more capacity has been restored in the industry, yields have decreased a bit.
In late 2023 and early 2024, the biggest theme among airline executives was how they’re furious at Boeing for the company’s failure to deliver new aircraft, plus they’re angry at Pratt & Whitney engine issues for leading to Airbus jet groundings. Airbus has also had some delivery delays, but nothing nearly as significant as the other two issues.
For example, in January 2024, United CEO Scott Kirby wasn’t happy about the 737 MAX delivery delays, stating that “we’re still going to be the fastest growing airline, but we’re not going to be as fast growing as we planned.”
Now in recent weeks, that narrative seems to have shifted drastically. Airline executives now talk about how the industry is dealing with overcapacity. That’s an interesting claim to make, when we’re still seeing a record number of people traveling, especially in the United States.
Furthermore, surely airline executives realized that capacity would increase in 2024 compared to 2023, as many airlines globally still had some of their fleet grounded after the pandemic… no?
So how do you in a matter of months go from being angry at aircraft manufacturers for not delivering planes fast enough, to arguing that there are too many planes flying, all while travel demand has continued to be quite strong in terms of raw numbers?
![](https://cdn.onemileatatime.com/wp-content/uploads/2021/04/American-737-MAX-Miami.jpg)
What does overcapacity mean, really?
When airline executives say there’s overcapacity, are they arguing that there’s too much supply, or not enough demand?
Broadly speaking, network carriers are having no issues filling planes, but the problem is maintaining decent yields. Almost all airlines saw yields drop from 2023 to 2024, meaning that people are paying less for their tickets than before. That shouldn’t come as any surprise, given how many planes globally were still grounded in 2023.
So when airline executives warn of overcapacity, I have to make one of two assumptions:
- They’re essentially attempting to signal to their peers that they want to cut capacity in order to raise fares; think of it as a legal form of collusion
- I think they’re basically acknowledging that the cost structure in the airline industry has become so high that they need to be able to raise fares in order to continue building on their profits
What’s interesting is how different airline CEOs view the demand for air travel, which is also directly what informs their perception of what constitutes overcapacity. During United’s Q2 2024 earnings call, CEO Scott Kirby made it clear (as he has many times before) that he believes the demand for air travel is inelastic.
When talking about the airline revenue to GDP ratio, Kirby notes how that ratio has declined due to overcapacity in the industry. Here’s how he explains that:
“The reason that happens is because demand for air travel is inelastic. Like the very first project I worked on when I was an analyst at American Airlines was estimating demand elasticity, it is inelastic, every bit of analysis you look at says that demand is inelastic. But when airlines get over their skis on capacity, they rush to get the load factors up and they lower prices and that lowers overall revenue. So it really is just as simple as this ratio goes down when supply exceeds demand.”
![](https://cdn.onemileatatime.com/wp-content/uploads/2024/05/United-737.jpeg)
Can airlines really artificially raise airfare?
Several airline executives are essentially signaling to one another that they’ll cut capacity this fall and beyond in order to be able to raise fares. If you’re like Kirby and truly think the demand for air travel is inelastic, then I suppose that makes sense.
However, I’d argue that executing this strategy is easier said than done for a few reasons:
- You have some very desperate ultra low cost carriers at the moment, which would be delighted to add capacity within the Americas, and shift around their networks for any areas where legacy airlines try to raise fares
- Airlines have very high fixed costs, and choosing to reduce capacity is much more costly than before the pandemic, given much richer labor contracts that can’t be renegotiated, among other things
- It’s one thing if airlines had this narrative while also retiring older aircraft and shrinking, but United is still going full steam ahead with adding aircraft, and for that matter, airlines want a big fleet for peak season
![](https://cdn.onemileatatime.com/wp-content/uploads/2023/02/Delta-767-JFK-Sunrise.jpg)
Are airline executives acknowledging a new reality?
As I always say, I don’t envy the jobs of airline executives. The airline industry is so essential to the world (people love travel, it’s vital for economies, etc.), and it’s also an industry of passion… but my gosh, it’s a really bad business.
Under the best of circumstances, it’s low margin. But it’s also highly cyclical, with high fixed costs, the inability to easily adjust capacity, and that doesn’t even account for all the outside factors that can impact the demand for air travel.
At the end of the day, airline CEOs work for Wall Street. Even the best run airlines aren’t actually good long term investments. But of course airline executives always have to sell the dream that the only way the industry is going is up, and that the problem is that Wall Street just doesn’t understand airlines.
If you ask me, this overcapacity claim comes down to a couple main points:
- Airline executives are realizing that growth is slowing down, so they can no longer sell the dream that business travel will be back to 100% of pre-pandemic levels shortly, or that Asia demand will soon recover to pre-pandemic levels
- Airline executives are having to deal with the harsh reality that their new labor contracts are really costly, and those are costs that can’t easily be adjusted down, short of a bankruptcy filing
No CEO wants to say during an earnings call “well, last year was good because everyone was still ramping up, but just realistically I don’t think we’re going to see that again, because this is a crappy industry.” So instead, I think the current narrative is just that capacity cuts will help with the current situation, but I’m not convinced.
You have far too many airlines that are desperate to stay afloat, and which will gladly undercut the legacies. So while the legacies might think their 10% margin isn’t good enough, there are airlines with -10% margins that would be happy if they could improve that to breakeven.
So call me an optimistic (or pessimist, depending on how you look at it), but I don’t think we’re suddenly going to see airfare increase significantly, given how competitive the industry is. Instead, I think airline CEOs will have to find a new way to explain that margins just aren’t great… this is the airline industry, after all!
![](https://cdn.onemileatatime.com/wp-content/uploads/2022/08/Frontier-Airlines-A320neo-14.jpeg)
Bottom line
Currently we’re hearing several airline executives talk about how the industry is dealing with overcapacity. They seem to define overcapacity as no longer being able to achieve 2023 yields. But that seems unrealistic to me, since 2023 was a one-of-a-kind year in terms of strong demand, combined with airlines ramping up operations.
As much as some airlines might try to reduce capacity, I don’t think they’ll be able to meaningfully increase fares, given how many airlines are fighting to stay alive. I think some people are just coming to terms with the long term implications of the new cost structure in the industry, and how those costs can’t fully be passed on to consumers, given the competitive landscape.
What do you make of this airline industry overcapacity narrative, and how do you see this playing out?
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!!
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...
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.
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.
If air travel demand is price inelastic, then why do promo fares exist? Or more generally speaking: why does revenue management exist?
I think airlines may raise prices on specific routes. If there are many airlines offering that route or a lot of demand.
Did someone say "oligopoly"?
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,...
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.
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.
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?
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...
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.
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...
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.
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.
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.
Thanks for saying this. Agreed 100%.
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...
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.
What about airlines trying to make more money off miles than miles actually flown?
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.
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...
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.
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.
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.
It's nice to see the air travel industry not consolidate into a giant monopoly
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.
Nice analysis.
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.
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
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
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
I’m confused did TD mention delta or did you ? You guys are insufferable
Like x 60 billion. It shouldn’t be hard to see where the problem really lies
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.
Like x1000
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.
@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.
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.
bs. look up how much inflation got pumped by quantitative easing vs direct cash to end consumers/debt forgiveness. math is your ugly gf.
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.
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.
1000 words by your favorite Chat GPT user in 3.2.1… Bonus points for A350-1000 references to ICN.
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...
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"