From fuel prices to terrorism threats, in recent years the list of woes sapping profits from airlines and driving some into bankruptcy could fill volumes. But in one sense, a single problem says it all: too many planes.
Excess capacity undercuts fare structures and deflates the key metric of revenue per available-seat-mile (ASM). Carriers with the most planes become the biggest losers.
So when America West Airlines merged with bankrupt US Airways Group Inc. in September 2005 and put America West’s managers in charge, part of their plan was to pare their combined fleet, slashing expenses and “sizing” the new US Airways to compete vigorously as a low-cost carrier. Among airlines that offer limited amenities, it would enjoy the same skies so friendly to LCCs (low-cost carriers) such as Southwest and JetBlue. Slashing labor costs was central to the bankruptcy process, of course. But the new, merged US Airways also was at the forefront of another industry trend — capacity reduction — practiced by airlines both bankrupt and solvent, both low-cost and full-service.
A year has passed since CEO Doug Parker and CFO Derek Kerr, former high-school friends from Michigan, flew US Airways out of Chapter 11 (see “The Long Haul,” CFO, February 2005). Its strong profit levels so far have surprised even them, as a number of factors fell into place: an $860 million recapitalization exceeded their target by $330 million, synergies have run ahead of schedule, and traffic has increased industrywide. More important, US Airways’s renegotiations with General Electric’s leasing arm have enabled the airline to cut its fleet by 15 percent, to 359 planes.
“Without the bankruptcy process,” says Kerr, “we would have ended up having 60 too many aircraft.”
Significantly, Tempe, Arizona-based US Airways insisted that the planes be reassigned to foreign markets, helping cut overall domestic industry capacity. That was important because fare increases take better hold in an environment without excess seats. And US Airways’s fleet reduction has helped lead a recent shrinking trend among nearly all American carriers. “Because of that, you’ve seen 8 to 9 percent price increases stick across the industry,” says Kerr.
In a rare case of harmonic convergence among fierce competitors, in fact, industry goals and individual airline goals are served by reducing ASMs. United Airlines emerged from bankruptcy in February with 107 fewer planes. Delta Air Lines and Northwest, still in Chapter 11, have sharply pared their fleets, too (see “The Bankruptcy Diet” at the end of this article).
No Folding Required
For years it was assumed that if industry capacity were to shrink by the needed 20 percent or more, it would be because some major carriers folded, according to airline analyst Helane Becker of The Benchmark Co. “If you look, that much has come out of the system. It just hasn’t been in the form of an airline going out of business.” Reduced capacity underlies the airlines’ return to profitability in the face of soaring fuel costs this year — in US Airways’s case, resulting in profits far beyond its postbankruptcy forecast.