Airlines’ survival depends on their ability to shrink
ASSOCIATED PRESS
Like most businesses, airlines want to grow. But during these difficult economic times, their survival depends on their ability to shrink, as they try to match how much they fly with the number of travelers willing to pay for a ticket.
Just like Detroit shutting factories rather than building more cars than people want to buy, airlines are reducing the number of available flights to avoid flying empty seats around the sky. That saves them money on fuel and labor costs. Airlines also hope it will tip the supply-and-demand equation back in their favor and allow them to raise fares.
What the industry calls capacity cuts began last year as oil prices spiked. At one point fuel amounted to 40 percent of an airline’s costs, said Morningstar equity analyst Basili Alukos, who covers airlines. Cutting flights was one way to reduce that expense.
Last year’s fuel prices were the first blow of a one-two punch for airlines. The other has been the recession, which has cut business travel sharply. Airlines rely on business travelers for profits because they generally buy higher-priced last-minute tickets and front-of-the-plane seats.
UBS analyst Kevin Crissey estimates that American Airlines will cut flying by 10.4 percent in August, and that United will fly 6.3 percent fewer seats. The biggest carrier, Delta Air Lines, will reduce capacity by 3.9 percent in August.
Even Southwest Airlines, which has never planned a capacity cut, plans to reduce flying by 6 percent this year. Here are some questions and answers about capacity cuts.
Q. What is airline capacity?
A. Capacity is the amount of space available on an airline’s flights. Airlines measure it in “available seat miles.” That’s one seat flown one mile, whether or not someone paid to sit in it. A reduction in seat miles equals less capacity.
Q. How do airlines cut capacity?
A. Two big ways: smaller planes and fewer flights.
Q. Is it working? By flying less, have airlines managed to raise fares or become profitable?
A. Profitable? No. And fares are down this year. But it could have been even worse for the airlines.
The International Air Transport Association expects North American airlines to lose $1 billion this year but notes that those airlines lost $5.1 billion last year in part because of rising fuel prices.