Airline stocks sold off sharply this week as Wall Street got some jitters about the industry’s ability to maintain its high levels of profitability. The fears may have been caused in large part by an interview that American Airlines CEO Doug Parker gave to Bloomberg News in which he said his company will “compete aggressively” against rivals that cut fares and add capacity.
“We’re not going to lose customers on price,” Parker told Bloomberg News.
The prospect of a summer fare war is more credible this year considering that the airlines are spending a lot less on fuel thanks to the low level of oil prices, so they have more flexibility on pricing. And airlines have been moving toward capacity increases as demand remains strong. Southwest, for instance, said it expects to grow its capacity by up to 8 percent this year.
Still, we’re not so sure that fare wars are in the cards for this summer, especially when you look at the supply/demand balance.
Airlines for America (A4A), the trade organization for U.S. carriers, recently came out with its annual summer travel forecast, and it did in fact predict that airlines’ total capacity during the June-August period will show a 4.6 percent increase over the same period last year. That’s an extra 126,000 available seats every day this summer.
But at the same time, the organization said it expects to see 2.4 million people flying every day this summer. That’s an increase of 4.5 percent from last year, or an extra 104,000 a day. In other words, almost all of the increased capacity during the peak summer season will be taken up by increased passenger demand.
A4A said the expected total of 222 million passengers flying on U.S. carriers this summer would be the highest level ever; that prediction includes 31 million travelers on international flights — also a record.
If we are going to see airlines competing more aggressively on fares, that’s more likely to happen during the fall season, when vacation travel falls off and much more of that extra capacity will go begging.
Here’s a graphic summarizing A4A’s 2015 summer air travel forecasts.
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