Editorial: Too Much Capacity or Not Enough?

The dramatic exit of a JetBlue Airways flight attendant from his aircraft via an emergency slide after unleashing a foul-mouthed tirade over the intercom, allegedly after an encounter with a badly behaving passenger (see Odds & Ends, p. 88), says much more about the breakdown of civility and self-control in 21st century America than it does about flight attendants or airline passengers. Nevertheless, it is fair to observe that the phenomenon of full and nearly full aircraft, when combined with the hassles of air travel, has raised stress and anxiety levels for all involved.

We are not sure much can be done about stress-inducers like long airport security lines and loss of privacy; these are just facts of modern life. But we do think that the issue of crowded airplanes, or more accurately the record passenger load factors being experienced in the US, may be ripe for reexamination, particularly in light of the ongoing consolidation that is expected to lead to further capacity rationalization.

As has been noted before, US domestic airline capacity (ASMs) remains well below 2000 levels. Data cited by the Air Transport Assn. show that scheduled ASMs for the third quarter of 2010 were about 7% below ASMs in the third quarter of 2000. The number of daily departures declined around 18% over the period. In 2000, for example, FAA Air Route Traffic Control Centers handled 24,987 air carrier IFR aircraft. In 2009 the figure was estimated at 22,217.

Add this all up and it should not be surprising that aircraft are more crowded. In 2000, the average load factor was 72.4% and the airline industry earned $2.6 billion. Last year, it was over 81% and the industry lost around $2.5 billion.

No one disputes that such high load factors introduce stress: Planes take longer to load and unload; operational disruptions are more difficult to fix; passengers scramble for bin space and elbow room; lavatories are always occupied; flight attendants have to work harder. Yet if you ask virtually anybody in a management position at a US airline today, he or she will say that overcapacity is a fundamental problem hindering airline earnings potential.

Once you get outside the executive offices, however, there is less unanimity of thought. Former American Airlines CEO Robert Crandall may be the heaviest hitter to weigh in, but there are plenty of others like him who think that the pendulum has swung too far in the other direction and that the industry has too few seats. “I don’t believe we have an excess-capacity situation. If anything, we have inadequate capacity because 80% load factors are too high,” Crandall said earlier this year (in June, the nine largest US carriers had a combined average load factor of 86.7%).

Apostles for the excess-capacity position understand that with load factors approaching 90%, it’s getting tougher to make the case for actual excess physical capacity. But they offer a caveat: While conceding that the data do not show that too many seats are chasing too few passengers, they posit that a lot of capacity cannot be operated profitably at today’s average ticket prices (which are below the level of 2000 in current and inflation-adjusted dollars). Therefore, it follows that the industry has excess capacity. One way to eliminate this uneconomic capacity is to permit consolidation.

Writing in a recent issue of NationalJournal.com, Crandall called this view “nonsensical,” arguing that “in the long run [it] would leave aviation—and any other scheduled transportation system—with so little capacity that it would be unusable for those who need to make unplanned trips and to change plans at will, notably the business travelers so essential to economic vigor.”

To Crandall’s way of thinking, “Excess capacity is the capacity offered but unused—not the amount that exceeds what will earn a profit at existing fares.” Airlines, he charged, “have been unwilling—collectively—to raise fares sufficiently to earn their cost of capital.” He cited a number of reasons for this. Chapter 11 has protected carriers from the consequences of their actions. Unions, he charged, also have been protected (employees of American, United, US Airways, Delta and Northwest would certainly dispute this last point).

Perhaps another way of stating this view might be to say that the industry either has a cost problem or a revenue problem but it does not have an overcapacity problem. The reorganizations and restructurings of the last decade certainly took a chainsaw to the cost side of the equation. Maybe the industry needs to rethink its assumptions about pricing. Because if airlines do not have pricing power with 86% load factors, the question has to be asked whether they are doing something wrong.