Airlines face capacity dilemma

Airline chiefs gathering for their annual meeting in Berlin on Monday face the biggest decision since the recession: whether to boost capacity as demand for travel surges or restrict supply and focus on raising ticket prices.

Air China Ltd has already opted for growth, adding 9.8 percent more seating in April and planning a 12 percent increase this year as it takes delivery of 33 new aircraft through 2011. In Europe, carriers have been more cautious, with capacity at Air France-KLM Group, the regional No 1, unchanged last month.

Recovery trends following the Sept 11 attacks, the Asian financial crisis and the SARS outbreak suggest carriers should err on the side of caution. While adding planes, frequencies and routes will lift sales, offering too many seats too quickly can erode occupancy levels, leading to fare discounting and shrinking profitability.

“We grew quite aggressively in the late 1990s and one of the things we learnt was that margins tend to go down quite quickly,” British Airways Plc Treasurer George Stinnes said. “The minute you put a chunk of capacity in – rather than doing it carefully – you start to impact pricing.”

British Airways, Europe’s third-biggest carrier, had aimed to lift seating 1.3 percent last month before strikes by cabin crew prompted a 4.7 percent drop.

Traffic rose 5.8 percent globally in the first four months, even after the Icelandic ash cloud grounded flights, recovering from a record 3.5 percent decline in 2009 and helping to fill 77 percent of available seats.

While carriers have so far shown restraint in chasing that demand, with capacity up 1.6 percent through March 31, before the effect of the ash plume, that could quickly change as Airbus SAS and Boeing Co begin to accelerate deliveries to companies such as Air China, said Chris Tarry, an independent analyst in London who has followed the industry for more than two decades.

“The concern is that we’re going to get a lot of capacity coming in quickly,” Tarry said. “That’s because of much of the downward adjustment was from planes being flown less, and it’s very easy to turn the taps back on, and because aircraft production rates are being pushed back up to what they were.”

Air China has gained 24 percent this year.

The financial performance of carriers in the rebounds that followed previous slumps suggests that traffic growth alone isn’t enough to deliver sustained profitability.

After the Sept 11 attacks the industry suffered losses for six years, according to International Air Transport Association (IATA) figures. In 2005, with passenger numbers 23 percent higher than in 2001 at 2.02 billion and sales up 36 percent at $413 billion, the industry still lost $4.1 billion. Over the same period fare increases consistently lagged the rise in expenses.

IATA’s latest guidance, issued on Monday, suggests carriers will post a profit of $2.5 billion this year, reversing a $10 billion loss in 2009, rather than the $2.8 billion deficit it had predicted as recently as March 11.

Passenger traffic is likely to rise 7.1 percent, up from an estimate of 5.6 percent, IATA said, while yields, a measure of ticket prices, may advance 4.5 percent versus a prior 2 percent prediction, recovering from a 14 percent decline in 2009.

Still, IATA says boosting seat occupancy will be “a challenge” as the rebound slows and 1,340 new aircraft are delivered through the year. The industry has posted a profit in only two of the past nine years, accruing losses of $50 billion.

Bloomberg News

Tags: aviation industry, Global aviation