Towards a new US marketplace? – consolidation, capacity reduction and international redeployment
US airlines, confronted by the clear evidence of a softening market, “excessive competition” and, in many cases, still overweight operations, are busily signalling to the market that they plan to reduce or slow capacity growth in the new year.
United Airlines this week stated it “sees no business case to grow domestically”, and announced plans to reduce capacity in its primary US operations by 3-4% in 2008. Southwest Airlines, Continental Airlines, American Airlines and Delta Air Lines have also clearly stated that they will either cut back or reduce capacity expansion in 1Q08. The word is out, along with the implied invitation for competitors to follow suit.
And, some of that capacity being taken out of the US market will find its way offshore, into the more attractive international markets. British Airways, for example, yesterday reported 5% growth in its “still strong” long-haul premium market, including the North Atlantic – although short-haul is continuing its weak downward trend.
Domestically, the consensus is growing among US airlines, supported by analysts who are increasingly gloomy about the profit outlook, that consolidation in the US market is essential. What they really mean is that capacity needs to be reduced.
Some quotes from this week’s Reuters gathering: "You will have a recession some time, and the impact on the airline industry will be dramatic… All of that leads to consolidation, I think." – Gary Kelly, CEO, Southwest Airlines; “We'll be growing international in relatively unabated terms... We're also looking at the consolidation question." - Ed Bastia, President, Delta Air Lines.
To merge, large US airlines first have to convince reluctant anti-trust authorities and then actually consummate a complex combination of networks, unions, cultures and brands. This is a formidable task, even in good times – which these will not be. So, while they talk consolidation, the airlines will generally be hoping that someone else will do it first. The prospect, for example, of Southwest actually announcing a merger with a legacy airline would be equivalent to Madonna announcing she will marry George W. Bush.
Does this redirection in US in airline markets become a global disease? – or, perhaps more accurately, how quickly does this become a global disease? As consumer confidence in the US softens, with falling house prices and tighter credit, The Bank of England, that yesterday reduced interest rates by 0.25%, stated: “Conditions in (UK) financial markets have deteriorated and a tightening in the supply of credit to households and business is in train, posing downside risks to the outlook for both output and inflation further ahead”.
Although the Asia Pacific airline industry is now a very powerful global force, the very nature of that global industry means that there are few places to hide when the cold winds of economic slowdown start to blow.