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The Biggest Change in the Airline Industry in the Past 10 Years: Capacity Control

Airlines in the United States continued their conservative growth announcing that they will shrink capacity by .5% in the 4th quarter compared to the same period last year. In the 3rd quarter they only increased it 1.1%. This is a major, major shift in how airlines have operated compared with 5-10 years ago.

Domestic capacity has dropped 10% compared with the 4th quarter in 2007 and international has been reduced more than 5% in that time period. Even with the recession, that shrinkage has allowed airlines to keep fares high with 6 of 13 domestic airlines in the black for the first half of 2011.

For years airlines threw capacity into the market with seemingly little regard for the financial implications. They frequently skirmished on fares and threw excess capacity into markets in a bid to gain market share. That rarely happens anymore, certainly in part to the lack of new entrants in the marketplace driving down prices in a bid to make a name for themselves. With no new entrants making ridiculous pricing and capacity decisions, there were no crazy competitive responses. In addition, with Delta and United emerging from bankruptcy and the former taking over Northwest, while at the same time fuel prices going through the roof, airlines truly focused on smart growth and right-sizing their businesses. And, incredibly – considering how bad they’ve been at this in the past – they have maintained the slower rate of growth, preferring to take seats out of the market and keep fares higher rather than try to grow by underpricing themselves.

Mix all that together, and it appears the industry is in the best position in years. No, they’re not all profitable. But fuel has as much to do with that as anything. It’s more amazing that half the airlines ARE able to turn a profit with fuel where it is. Smart capacity control has been a major factor in making that happen.

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  1. I agree with you that there has been a profound change in the way US airlines are managed. It’s become a much more viable industry. Unfortunately, this change has come at the same time (and been partly influenced by) the financialization of the oil market. Even though oil fundamentals are relatively poor (4% decline in real gasoline demand in the USA the past year), oil prices keep going up as investors chasing returns (in Bernanke’s zero interest economy) buy paper oil contracts. When the oil market finally crashes (seems inevitable as supply rises and demand falls) — or even if oil prices remain flat — the new found health of the airline industry will become more apparent to Wall Street.

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