Revenues Are Up, But Can Airlines Avoid the Perils of Overcapacity?

The news for airlines is good, but the forecast for passengers who dream of stretching out in an adjacent empty seat isn't encouraging. And that's a good thing.

March traffic numbers are in, and airline industry is gaining strength. Since we're looking at comparisons to last year, when the industry was in the toilet, you'd hope the trend would be favorable -- and it is. Airlines that report unit revenues show increases around 30 percent over last year. The economy is on the upswing, and things are looking rosy. Let's see if this crop of airline managers can restrain themselves and avoid dumping too much capacity into the market.

Capacity issues have plagued airlines for ages. When times are good, they buy airplanes and add capacity like it's going out of style. Just look at United's route map back in 1999 to see what I'm talking about. Inevitably, the economy turns down and things fall a part. You think the airlines did so poorly in the 2000s because of September 11? They were already troubled before that happened. 9/11 just made things worse.

The problem with having too much capacity is that you can't take it out easily. Sure, after September 11, they all retired some old planes, but there is a cost to that too, and there just aren't many more of old birds left flying around in the US. It's better to keep capacity under control and do well during bad times and very well during good times.

Of course, constraint within existing airlines usually encourages some starry-eyed entrepreneur, who thinks that airlines are glamorous, to throw a bunch of money down a hole as by adding new service and boosting overall capacity. When the downturn hits, his money is gone. In the meantime, it means low fares, so customers are happy. But it also means a sick industry.

So as we come out of this recession, it's important to look at monthly traffic numbers to see how airlines react. Thus far, sanity prevails. Other than Allegiant's 15 percent increase, everyone else has been remarkably restrained so far. JetBlue and AirTran are the ones to watch the most, but they aren't taking delivery of many new airplanes, so there's reason to be hopeful.

Here is the year-over-year comparison for March: ASMs = available seat miles (number of available seats x number of miles each seat flew) RPMs = revenue passenger miles (number of seats with butts in them x number of miles each seat flew) Load Factor = RPMs/ASMs

[Photo via Flickr user Daquella manera]