The Seat Excess Is Real. The Solution Isn't So Obvious.
The Over-Capacity Myth
Well, it's not really a myth. There clearly is over-capacity in the industry. It's obvious - just look at all those seats chasing too few passengers, most of which aren't willing to pay what it costs to carry them.
But the oft-mentioned "solution" - i.e., let a couple of legacy carriers go bust, is a myth, because that wouldn't do diddly to engender an environment that would be yield-friendly. The reason is simple - it wouldn't do much to reduce capacity in the biggest markets.
Counter To Ambient Thinking. But, We Think, Accurate. We'll be covering this in detail at or Annual Forecast Conference in October, but here's a couple of conclusions our research has found.
The Boyd Group has run a number of airline-failure scenarios through our traffic demand model. What we've found, a la Economics 101, is that capital and assets chase the highest and best returns. In virtually every reasonable scenario, when the dust settles, the following is the general competitive picture:
Reductions In Major Markets Would Be Flow-Driven. Take Philadelphia, for example. If US Airways failed, the top twenty PHL O&D markets would merely see shifting of market shares. The US Airways capacity that was being subsidized by contributory hub flows would tend to represent a temporary reduction in capacity. But at PHL such flow traffic is relatively limited, and the remaining capacity in the top 20 markets would likely still represent levels that make yield increases very difficult.
Mid-Size & Small Markets Would Take The Hit. The "incremental contribution model" - also known in cocktail party repartee as the hub-and-spoke system - is based on the feed that can be generated from many cities, including relatively small ones, into the hub.
Here's a flash: the loss of, say, United or US Airways, would result in capacity being reduced in mid-size and smaller markets which are supported and made economically viable by the power of the connecting hub operation. Simply put, without the hubbing operation, the local O&D to the hub city is not supportable. Try the US Airways service between Lebanon (the place in New Hampshire, not the country used as target practice for terrorists) and Philadelphia. Like, there isn't enough local O&D in that market to fill a VW Microbus. Eliminate the US Airways hub at PHL, and, voila! - instant capacity reduction. Except it's not in the markets where the real competition and over-capacity are.
But even strong mid-size markets will get capacity-zapped, too. The fact is that at places like Bangor, Grand Junction, and Albany, the majority of the O&D traffic is from markets that, each taken alone, represent less than 1% of the airport's total. Take out a hubbing carrier, and the "incremental" passengers from dozens of places that make up the majority of the traffic base will find it tougher to get to and from places like BGR.
Yes, some will say, but other carriers will pick up the slack. Sounds good, but it ain't necessarily so. First, staying with the BGR example, the loss of US Airways' PHL hub would eliminate the most direct connectivity to dozens of markets in the Mid-Atlantic and in the South. Some traffic could get re-flowed over CVG or maybe DTW, but if you're heading to Orlando, that's a long way around just so the kids can ride Dumbo. If you're coming from Savannah, intent on a romantic lobster dinner on the Penobscot, you now have the choice of taking the round-about scenic route, or maybe even the thrill of a double-connection, which could kill anybody's appetite. (Good news for the crustacean. Bad news for Bangor.)
And even here, we find another potential barrier: paradoxically, it's capacity. See, hubbing carriers serve mid-size markets such as BGR (and ALB, and LAN, and so on) to meet their banks. Adding additional flights that are off-bank makes no sense. Very often, upgrading capacity isn't an option, either. Take Northwest's pattern between Bangor and its Detroit hub. They can upgrade from 50-seaters to 69-seat ARJs. But the airline has a limited number of these aircraft. The capacity issue here is also affected by available fleet mix. Between 70-seats and roughly 125 seats, there's a very real aircraft gap, particularly when viewed in terms of sector costs.
Other Issues. Sure, some will posture that in the event of a major airline failure, low fare carriers will jump in. They certainly will. But only in the biggest and most competitive markets. Keep in mind that the economics of the "low cost model" increasingly are gravitating toward larger, not smaller, markets. (And don't fall for the "JetBlue is getting regional jets" nonsense. The E-190s they've ordered are miles from being regional jets. Anybody whose seen the E-190 prototype up close and personal, as we have, understands this.)
Lots of questions? Sure. There are many what-ifs in regard to a major airline failure. But we've got what we believe are insightful and plausible answers. We'll be going over these airline-failure scenarios in detail at our Annual Forecast Conference. We'll be covering the effects such failures would have on specific regions and specific types of airports. So, clear your calendar for October 10 - 12, and join us in Denver.
The Over-Capacity Myth
Well, it's not really a myth. There clearly is over-capacity in the industry. It's obvious - just look at all those seats chasing too few passengers, most of which aren't willing to pay what it costs to carry them.
But the oft-mentioned "solution" - i.e., let a couple of legacy carriers go bust, is a myth, because that wouldn't do diddly to engender an environment that would be yield-friendly. The reason is simple - it wouldn't do much to reduce capacity in the biggest markets.
Counter To Ambient Thinking. But, We Think, Accurate. We'll be covering this in detail at or Annual Forecast Conference in October, but here's a couple of conclusions our research has found.
The Boyd Group has run a number of airline-failure scenarios through our traffic demand model. What we've found, a la Economics 101, is that capital and assets chase the highest and best returns. In virtually every reasonable scenario, when the dust settles, the following is the general competitive picture:
Reductions In Major Markets Would Be Flow-Driven. Take Philadelphia, for example. If US Airways failed, the top twenty PHL O&D markets would merely see shifting of market shares. The US Airways capacity that was being subsidized by contributory hub flows would tend to represent a temporary reduction in capacity. But at PHL such flow traffic is relatively limited, and the remaining capacity in the top 20 markets would likely still represent levels that make yield increases very difficult.
Mid-Size & Small Markets Would Take The Hit. The "incremental contribution model" - also known in cocktail party repartee as the hub-and-spoke system - is based on the feed that can be generated from many cities, including relatively small ones, into the hub.
Here's a flash: the loss of, say, United or US Airways, would result in capacity being reduced in mid-size and smaller markets which are supported and made economically viable by the power of the connecting hub operation. Simply put, without the hubbing operation, the local O&D to the hub city is not supportable. Try the US Airways service between Lebanon (the place in New Hampshire, not the country used as target practice for terrorists) and Philadelphia. Like, there isn't enough local O&D in that market to fill a VW Microbus. Eliminate the US Airways hub at PHL, and, voila! - instant capacity reduction. Except it's not in the markets where the real competition and over-capacity are.
But even strong mid-size markets will get capacity-zapped, too. The fact is that at places like Bangor, Grand Junction, and Albany, the majority of the O&D traffic is from markets that, each taken alone, represent less than 1% of the airport's total. Take out a hubbing carrier, and the "incremental" passengers from dozens of places that make up the majority of the traffic base will find it tougher to get to and from places like BGR.
Yes, some will say, but other carriers will pick up the slack. Sounds good, but it ain't necessarily so. First, staying with the BGR example, the loss of US Airways' PHL hub would eliminate the most direct connectivity to dozens of markets in the Mid-Atlantic and in the South. Some traffic could get re-flowed over CVG or maybe DTW, but if you're heading to Orlando, that's a long way around just so the kids can ride Dumbo. If you're coming from Savannah, intent on a romantic lobster dinner on the Penobscot, you now have the choice of taking the round-about scenic route, or maybe even the thrill of a double-connection, which could kill anybody's appetite. (Good news for the crustacean. Bad news for Bangor.)
And even here, we find another potential barrier: paradoxically, it's capacity. See, hubbing carriers serve mid-size markets such as BGR (and ALB, and LAN, and so on) to meet their banks. Adding additional flights that are off-bank makes no sense. Very often, upgrading capacity isn't an option, either. Take Northwest's pattern between Bangor and its Detroit hub. They can upgrade from 50-seaters to 69-seat ARJs. But the airline has a limited number of these aircraft. The capacity issue here is also affected by available fleet mix. Between 70-seats and roughly 125 seats, there's a very real aircraft gap, particularly when viewed in terms of sector costs.
Other Issues. Sure, some will posture that in the event of a major airline failure, low fare carriers will jump in. They certainly will. But only in the biggest and most competitive markets. Keep in mind that the economics of the "low cost model" increasingly are gravitating toward larger, not smaller, markets. (And don't fall for the "JetBlue is getting regional jets" nonsense. The E-190s they've ordered are miles from being regional jets. Anybody whose seen the E-190 prototype up close and personal, as we have, understands this.)
Lots of questions? Sure. There are many what-ifs in regard to a major airline failure. But we've got what we believe are insightful and plausible answers. We'll be going over these airline-failure scenarios in detail at our Annual Forecast Conference. We'll be covering the effects such failures would have on specific regions and specific types of airports. So, clear your calendar for October 10 - 12, and join us in Denver.
