New Normal for Air: Capacity Cuts & Price Hikes
New Normal for Air: Capacity Cuts & Price Hikes

New Normal for Air: Capacity Cuts & Price Hikes

The eighth attempt by airlines to hike domestic fares this year failed, apparently due to lack of support from low-cost carriers. But agents can expect the major U.S. airlines to keep trying.

Market share bragging rights and ego may once have driven many airline decisions. But airline executives have replaced macho posturing with capacity and pricing discipline.

“We don’t have anything to prove in terms of size,” Jeff Smisek, chief executive officer of United Airlines, said at last week’s JP Morgan Aviation Conference.

United is currently the largest airline in the world, but if the economics dictate that shrinking is in order, United won’t hesitate. Oil prices are $104 a barrel and climbing, due in part to uncertainties in the Middle East. The higher they go, the more uneconomical it becomes to carry low-yield passengers.

Fuel, of course, is not the only problem. The airlines have lost millions in the course of recent phenomena like “snowmageddon,” which brought Delta’s Atlanta hub to a frozen halt for a week in January, and tragedies like the Japanese earthquake.

United is not the only carrier that has gotten capacity religion. All the major carriers told the JP Morgan conference they are watching the fuel situation and adjusting capacity accordingly.

Delta president Ed Bastian noted that it’s not just the absolute dollar amount of fuel that creates problems. The sudden spikes in prices make it difficult for carriers to react.

It took decades of fuel crises to teach the airlines that there are some passengers they cannot afford to carry. They have to focus on higher-yield passengers to survive.

“We love all our customers, but we love some of our customers more than others,” Smisek said.

It’s a simple equation: “The key to overcoming higher fuel prices is increasing revenue,” Beverly Goulet, vice president of corporate development and treasurer at American Airlines, said.

Impact on buying
That presents new challenges for travel agencies. Even those that have shifted their focus to non-air business must contend with the simple fact that travelers generally have to fly to get to where they are going.

Kathy Sudeikis

“I’ve never before had people say, ‘Oh, I don’t know,’ when they see the air fare. I’ve had families walk away from Europe,” Kathy Sudeikis of All About Travel in Mission, Kan., told Travel Market Report.

Some were multigenerational families that were planning major trips, said Sudeikis, vice president of corporate relations. The air fares, she said, “just take the wind out of people’s sails.”

Sudeikis noted that we’re in an “in-between” period: Customers have just returned from their spring break trips and Easter comes late this year.

But she wondered what will happen when her clients get serious about planning their summer trips. The low air fares that for many people provided the initial spur to travel simply aren’t there.

“Right now, I don’t think there’s any excitement about traveling,” she said. “People who are looking now see that the fare from Kansas City to New York is $618 and they get discouraged.”

For Lucy Hirleman, president of Berkshire Travel in Newfoundland, N.J., the air fare situation is a “double-edged sword.”

Lucy Hirleman

Interest in the U.S., Caribbean and Mexico is “way down” from last year, she said.

On the other hand, Europe and Hawaii are rebounding somewhat. “I think it's a backlash to the higher fares in other destinations,” she said. “You can fly to Ireland cheaper than to some islands, Mexico and U.S. cities.”

Hirleman also pointed out one of the quirks of today’s pricing: “If you look at a fare ladder, the taxes and fuel surcharges are the same or close to the base fare.”

Fares from New York to London are a case in point: The base fare for a randomly selected roundtrip in May was $245. Airline-imposed fees, including a hefty fuel surcharge, totaled $332. Governments and airports took a $204.95 bite. The grand total: $781.95.

‘Taxed like sin’
United’s Smisek noted that airlines are taxed more heavily than alcohol, tobacco or firearms. “We are taxed like a sin,” he said.

Sudeikis said the capacity cuts haven’t made it difficult to find seats so far, and she is even able to find affordable seats, “if you accept the new normal.” For example, she recently booked a trip from Kansas City to Paris with a return from Nice for $1,000.

But the airlines have made it clear that capacity will continue to shrink as fuel costs rise. Delta is lowering its capacity projections for the second half of the year. United will wait until the summer rush is over and take out capacity in the fourth quarter.

And like any rare element, an airline seat’s price will rise with its scarcity.

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Market share bragging rights and ego may once have driven many airline decisions. But airline executives have replaced macho posturing with capacity and pricing discipline.

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