A surprising slowdown in the growth of demand for airline seats this year had the CEOs of two major carriers squabbling last week, albeit indirectly, about how carriers should respond to the softening market.
The by-play between American Airlines’ Gerard Arpey and Southwest’s Gary Kelly illustrated the budding predicament in which U.S. airlines now find themselves.
Based on booming demand in 2006 and their expectations of a continuation of that trend, several U.S. carriers, led by Southwest, laid in plans to add lots more seats and flights this year.
But while demand is still up over last year, its rate of growth has slowed. Coupled with the new capacity added to the nation’s air transportation system this year, that’s making it hard for airlines to raise prices enough to offset rising fuel and other costs.
So far, Southwest’s Kelly is sticking with his plan to add about 8 percent to the airlines’ capacity this year, even though the growth of available seats industrywide is limiting Southwest’s ability to push its prices a bit higher.
But American’s Arpey, who entered the year expecting to tighten American’s supply of seats a bit in a bid to push up the average price paid by its passengers, was indirectly critical of Southwest for sticking with its aggressive growth plan, even as Kelly has complained publicly about the financial effects of industry capacity growth.
“Look at who’s complaining about poor revenue growth the most, and look at their own [capacity] growth,” American’s Arpey told reporters after the annual shareholders meeting of AMR Corp., American’s Fort Worth-based parent. He didn’t name a specific carrier. But Kelly has openly fretted about too much capacity being added across the industry.
“We’re not after bigger market share, like some. We’re after bigger profits,” he said.
History Lesson
Kelly, speaking with reporters in Dallas after his own shareholders’ meeting, compared the current situation to instances in 1990 and 1995, when demand surprisingly tailed off and Southwest continued growing.
Though its profits were diminished somewhat, the perennially profitable discount carrier was able to increase its presence in a number of markets and to grab a bigger share of the overall domestic market.
“We are more prepared for this kind of soft environment than any other carrier” Kelly said, pointing to Southwest’s strong balance sheet and record of profits. “We look at our ability to grow and our flexibility as a competitive advantage when we see that some competitors are already reducing service.”
On top of the 35 new planes Southwest is receiving from Boeing this year, it will add four used 737s to the fleet in 2007. But if demand softens further, Southwest can moderate its growth by retiring older planes, Kelly added.
American has reduced overall capacity 3.7 percent so far this year, and 4.3 percent in the domestic U.S. market as it has shifted some flying to more profitable international markets.
