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Airlines May Be Flying In The Face Of Reality


News: Analysis & Commentary: Transportation

Airlines May Be Flying in the Face of Reality

Big carriers are adding flights faster than demand can justify

In recent years, U.S. airline executives have been assuring investors that they've grown up. They keep insisting that the industry is now run by a more disciplined breed than the market-share-chasing, profit-decimating managers of yore.

Yeah, right. So that's why US Airways Group Inc. and United Airlines Inc. are bulking up flights a startling 53% at Washington's Dulles International Airport in the first half of this year. And that explains why U.S. carriers plan to beef up transatlantic capacity more than 10% in 1999, far outstripping the level of demand indicated by anticipated economic growth. All told, the industry expects to expand capacity by 5.6% this year, faster than the previous six years, says analyst Samuel C. Buttrick of PaineWebber Inc. Growth in 2000 should be close to 5% again. That's not massive compared with the 10% peak annual capacity growth in the '80s, but it's far faster than last year's 1.5% increase and 1997's 3.1%.

The inevitable result, predict a growing number of skeptics, will be too many seats chasing too few passengers--even taking into account rising estimates of U.S. growth, to around 3%, this year. Planes were more than 70% full on average in 1998. But analysts are bracing for more empty seats and a return to fare wars this year. Susan M. Donofrio of BT Alex. Brown Inc. figures net earnings for the 10 major carriers will fall 17% in 1999, to $4.4 billion, on 4% revenue growth. And that's assuming airlines can push through another fare increase, like the 2% to 4% hike adopted in late January, the first since September, 1997. "There is simply more capacity than is good for the long-term economics of the industry," says American Airlines CEO Donald J. Carty.

Airline analysts could see the buildup coming two years ago. But they didn't foresee the economic turmoil that would hurt demand in Asia and Latin America. Even at home, in the face of stronger-than-expected fourth-quarter economic growth and low fuel prices, the airlines posted flat revenue and falling profits. One reason: Corporations have been curbing travel budgets and balking at sky-high business fares. And the carriers also face growing wage pressures. American pilots, for instance, staged a sickout in early February over wages and other contract issues, forcing the carrier to cancel more than 2,400 flights.

Predictably, each carrier with big expansion plans argues that its outsize goal makes strategic sense. Continental Airlines Inc., for one, says attempting an 8.6% increase in capacity this year, after last year's 10.6%, is justified because it underinvested in Newark, Cleveland, and Houston hubs during two bankruptcies. US Airways is expanding its MetroJet operation as a defense against Southwest Airlines Co. on the East Coast.

But, warns Carty, "if you have that mentality at four or five carriers, then it gets away from you." American has trimmed its growth plans from 6% to 4% for '99. And despite its buildup at Dulles, United's overall growth this year is expected to be a modest 2.9%, trimmed from 3.6%. "We are all concerned about industry capacity," says Rono Dutta, senior vice-president for planning at UAL Corp., United's parent.FIRST TO BLINK. Competition on transatlantic routes may prove particularly intense. U.S. carriers have plans to boost capacity by 15% to 17% this summer. Some are rerouting planes from Asia, where demand remains slack. European carriers are expanding, too, which is likely to lead to deep discounts to fill empty seats in the peak travel season.

There is still time--not much--for airlines to scale back. Carriers start to promote summer flights to Europe in February and March. "If we don't see any [cutbacks] by mid-second quarter, we're stuck for this year," says Donofrio. And unless demand weakens considerably, some analysts believe the airlines won't feel the need to change course. After all, even the projected drop in earnings for 1999 makes this a good year by historical standards. But Carty argues that any missteps will badly wound the airlines' credibility on Wall Street.

Continental won't risk such a credibility gap, says President Gregory D. Brenneman. "If we see softness, we will stop the growth or even shrink the airline," he vows. "There's nothing sacred to us about the growth if we can't do it profitably." But for now, it looks as if Continental and others are waiting for someone else to blink first. The longer they wait, the better it looks for airline passengers--and the worse for airline profits.By Wendy Zellner in Dallas, with bureau reportsReturn to top


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