U.S. Airline Execs Defend Capacity-addition Plans

 - January 31, 2018, 9:09 AM
United Airlines plans to boost capacity by a rate of 4 to 6 percent a year through 2020. (Photo: United Airlines)

U.S. major airline executives insist that their plans to increase capacity more sharply than in recent quarters signal a desire to capitalize on assets, not a precursor of revenue-eating market-share battles.

United Airlines said on January 24 it plans to boost capacity by 4 to 6 percent per year through 2020. Its primary goal centers on driving more traffic through its hubs.

One strategy involves adding capacity in smaller spoke cities, such as Rochester, Minnesota, that will move higher-yield passengers through its hubs, explained president Scott Kirby. In recent years, United removed some of this capacity—often as part of its strategy to reduce regional-jet flying—and redeployed a portion of it on routes with stiffer competition, such as between its hubs and competitors' hubs. Such moves did little to help feed United's network. "We should not have done that," Kirby said. "But we're now doing it the right way."

United also has begun "re-banking" some of its hubs to create more connections, Kirby said. For example, reducing its banks at Houston Intercontinental Airport from 10 to eight boosted total itineraries by 21 percent while reducing aircraft movements by 2 percent.

"A hub-and-spoke airline is really a manufacturing company, and it is about manufacturing connections," he noted. "The more connections you can drive at a hub, the higher profits you drive at that hub, the more customers flow through that hub, and it's exponential."

American Airlines plans to boost domestic capacity by about 3 percent in 2018. Like United, it will add some smaller spokes to its network, including Missoula, Montana; Panama City, Florida; and South Bend, Indiana, CEO Doug Parker said. It also will add frequencies in some spoke markets.

What it won't do, Parker emphasized, is add service into competing fortress hubs, such as United's San Francisco base or Delta Air Lines's Atlanta hub. "That would be growth outside of our core asset base, and that would engender a certain competitive response from those carriers that do have a strategic advantage in those markets," Parker said.

Delta Air Lines has targeted what CEO Ed Bastian calls a prudent 2 to 3 percent capacity increase this year. Southwest Airlines will grow by about 5 percent overall and place most of its emphasis on the second half of the year, when its capacity will increase about 7 percent, CEO Gary Kelly said.

While mid-single-digit capacity increases might not seem extensive considering that global available seat miles (ASMs) increased 6.4 percent in the first 11 months of 2017, it marks a notable change for the largest carriers in the mature U.S. market. Systemwide U.S. domestic capacity as measured in ASMs rose about 3.6 percent through the first 11 months of 2017, the most recent International Air Transport Association figures show.

Expansion by smaller carriers markedly outpaced that of larger airlines, however. Spirit Airlines boosted ASMs 16 percent last year, for instance, while Allegiant grew 9 percent. Among the mega-carriers, American and Delta boosted ASMs only 1 percent each, while United saw a 3.5 percent increase and Southwest 3.6 percent.

American's Parker said that while he won't speak for colleagues at competitive carriers, his airline's strategy exploits existing strengths, rather than strives to create new ones.

"In the old days, airlines without real network assets were looking to use the good times to build some network assets and to take out the weakest when they did that," Parker said. "That kind of growth tended to have much different competitive ramifications than what we're talking about here with our growth. So let's talk about what we are doing. Because we're not doing that at all."