Premium #145 – Will Capacity Discipline Hold in the US Airline Market?

The US airline industry has rebounded solidly, showing its best profit margins since 1999.  With fuel prices dropping, the potential for even better airline financial performance appears on the horizon, positively impacting airline equities. Historically, there has always been either an exogenous factor, or competitive fare war, to bring high profits back to earth.  Is today’s surge in profitability different, and is it sustainable?  Let’s examine some trends, and examine some trends over the longer term.  We begin with traffic.

Although the US economic recovery has been slow, it has not been keeping people away from traveling by air.  Traffic is remarkably resilient, up over 21% between 1995 and 2013.  Air travel has a relatively inelastic demand, which is why Congress loves taxing it.  LCCs kept growing market share up to 2009, but since have appeared to level off a bit.  Travelers do not like to pay higher fares unless forced to, but since 2009, network carriers have held stemmed the decline in market share a bit better than before.  Network carriers have managed to keep LCCs at bay.

The US airline industry has consolidated and the impact is remarkable. There are over 11% fewer seats at year end 2013 compared to 1995.  Capacity discipline has resulted in improved productivity – more seats are full at departure.  The trend indicates we can expect further productivity gains, and full aircraft.  One potential disruptor to that trend could be lower fuel prices.  With lower fuel prices, older aircraft that were becoming economically, rather than technically, obsolete can remain in operation longer.  Could this result in a breakdown in capacity discipline among the majors and Southwest?  Time will tell.  Delta Air Line’s

bet on older aircraft seems to be paying off handsomely though.