Gordon Bethune, former CEO of Continental Airlines, once commented on reductions in the quality of service that “You can take so much cheese off the pizza that nobody will eat it.”
Irwin Stelzer examines the airline industry, where a long-awaited surge in profits has finally happened. Stelzer’s analysis is that the chronic over-capacity problem has been recently resolved. My understanding is that over-capacity was a consequence of lenders preferring non-performing loans to write offs via foreclosure.
In the United States, airlines are making money despite delays and horrible service. US Air, United, Delta, American Airlines, and Jet Blue have all reported hefty increases in profits. The reason: after a wave of chastening bankruptcies, they have cut capacity, bringing the number of available seats more into line with demand, and reducing the scramble to peddle empty seats at any price above the almost zero cost of carrying an additional passenger. This past summer, carriers operated at around 86 percent load factors (percent of seats filled), which is good for the carriers, but not so good for travelers wedged into middle seats or hoping to cadge a seat on some frequent-flyer program. Still, there are bargains available for anyone willing to take to the air on the slow travel days during the holiday season, a gift to the traveling public from Alfred Kahn, the Cornell economist who pushed through deregulation when chairing the now-defunct regulatory agency, and this month was toasted by his former students and colleagues at a 90th birthday celebration. Travelers might also hoist a glass.
Stelzer does not get into the details. I’ll speculate that the capacity reduction is largely a consequence of demand growth — I’ve not read of any meaningful numbers of aircraft being sunsetted.
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