This past week, analysts chastised American Airlines for what they perceive to be lackluster capacity control in light of rising fuel costs.  What they want is a tighter market for airplane seats and for fares to rise even more.   Airlines began reducing capacity by removing inefficient aircraft from their fleets either temporarily or permanently and put plans for new routes (i.e. growth) on hold.  This resulted in higher fares and, frankly, some pretty remarkable turnarounds for airlines.

In fact, it worked so well, analysts became instant fans.  The problem is, such capacity discipline is, in part, dependent upon the entire industry practicing it.  As you can imagine, it doesn’t work too well when one airline is reducing capacity and another airline adds it right back.  It works when the entire industry is facing a sudden change in market conditions that affects all of them equally.  Sudden, unanticipated rises in fuel costs are a good example of that.

But it isn’t the solution for the airline industry in terms of long term profitability.

There are solutions to rising costs that don’t involve reducing or restricting capacity.  Airlines can get more labor productivity or reduce costs elsewhere such as in food and drink.  They can lighten the aircraft to lessen fuel burn and they can add improvements to their aircraft to improve fuel efficiency.  Some have the cash to add newer, more fuel efficient aircraft to their fleet and some don’t.  In other words, not all airlines are created equal and while one set of airlines may wish for capacity control, another set of airlines may well see opportunity in that move.

Costs aren’t the only thing driving an airline either.  One airline’s flight attendant labor hour may equal another flight attendant’s labor hour in pay but not productivity.  One airline may well be managing their fuel hedging better than another.  One airline may have a younger flight crew than another as well. Capacity control can only do so much.

Capacity control is the short term solution to a long term problem.  Short term solutions don’t fix companies and they don’t promote good strategy.  What analysts should be calling for is better management, better fleet planning and better labor relations.   The value of that stock will ultimately be better for a longer period of time when the company is managed better over a longer period of time.

Filed under: Airline News by ajax