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Turism&Travel : Airline executives: This time will be different

Friday 18 June 2010

Amid the steady stream of positive air travel demand data, airline executives and industry observers no longer question whether a general recovery is underway.
Instead, the pressing questions now center on how strong and fast the recovery will be and whether or not airlines will react differently than during previous post-recession cycles.

The consensus among airline executives is that the industry will exercise "capacity discipline" by resisting the temptation to re-insert seats in markets that show strengthening demand. Should the industry exhibit such behavior, it likely would mean more crowded airplanes and could provide carriers the impetus to raise fares and an opportunity to take another run at sustained profitability.

"The No. 1 question I get from investors is, 'Is it different this time, or is the industry going to do what it has always done in the past and start growing again?' " said US Airways president Scott Kirby, speaking this week at a Bank of America investment conference. "I think it is different this time--and I know you should always be careful when saying that because any time you say that about anything it's rarely different--but it feels different this time for good rational reasons."

Most importantly, Kirby said, is that the entire industry--including low-cost carriers--"recognizes that we are a mature industry. This isn't a growth industry any more. It's hard to rationalize all the capacity that exists today, and it's even harder to rationalize new capacity on a going-forward basis. It is hard to justify buying new airplanes when you know that fuel could go back to $150 a barrel.

"The industry, by and large, has CEOs with different views than the CEOs of yesteryear," Kirby continued. "They are much more focused on returns and financial performance than they are on empire building, 'how big is my airline, what is my market share, how many cities do I fly to,' etc. Things can change in a hurry, but I don't think rapid capacity growth is going to become a problem in this industry, at least for the foreseeable future."

Speaking at the same conference, Delta Air Lines president Ed Bastian also cited capacity discipline, volatile fuel prices and management focus on shareholder value. "You have companies that have gone through the bankruptcy process and are highly sensitized to generating and delivering the kind of return that is required," he said. Bastian also predicted that industry consolidation would progress, "allowing us to manage the overall capacity levels in a better way. You'll see the alliances deliver that same discipline from an international standpoint."

American Airlines CEO Gerard Arpey agreed that the proposed United-Continental merger "will allow for one fewer choice in the marketplace and should contribute to a more rational balance between supply and demand.

"If we assume the current economic recovery has legs, then I think as an industry we are much better positioned to leverage the upturn than we have been in previous recoveries," Arpey continued. "There are far fewer seats for sale in the marketplace today than there were five years ago. There are also hopeful signs that the industry has learned its lesson about keeping capacity growth in line with demand--and will continue to apply that lesson even as the economy comes back."

Last month, J.P. Morgan analysts expressed sentiments similar to those shared this week by airline leaders. "Management composition appears stronger to us today than at any time in the past," they wrote in a May 25 research note. "No former heads of Boeing's 737 and 757 programs are running U.S. airlines, ordering aircraft. No airline is majority-owned by labor and run primarily for its benefit. The nation's largest discounter [Southwest Airlines] appears more interested in margin than market share, having ceased growth for the first time in its history. While always dangerous to proclaim 'It's different this time,' the fact of the matter is that, by all fundamental measures, it appears to us to be true."

Crowded Airplanes

U.S. airlines as a group in 2009 cut domestic system capacity by about 10 percent. With just a few exceptions, airlines reported further reductions this year and, as of now, generally expect their full-year 2010 capacity to be roughly flat, give or take a few percentage points.

Such capacity control combined with demand growth already has made planes more crowded in the skies over the United States. In each of the first three months of 2010, the U.S. airline industry produced record domestic and systemwide load factors, according to the U.S. Bureau of Transportation Statistics. The trend continued in April and May as the largest carriers reported further load factor increases, in most cases to 80 percent or above.

Airline executives hope crowded planes will prompt travelers to pay extra for favorable seat assignments. At Continental Airlines, for example, new exit row seating fees are "a homerun for us," said CEO Jeff Smisek. "We are generating $120,000 a day from this one product. Customers value it."

Autor: eTurboNews
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