Startling capacity statistics April 1999

Overcapacity is rearing its ugly head again. In the February issue of Aviation Strategy (pages 3–5), we started to puzzle over where all the scheduled deliveries in 1999 could be going. Now an original analysis by James Halstead, the highly–rated airline analyst at Credit Indosuez Cheuvreux, reveals some disturbingly high capacity growth rates, well above the most optimistic demand predictions.

The analysis is based on manipulation of the major airlines’ published schedules from the Official Airline Guide, crunched by Back Data (however, the interpretation of the results in this article is essentially that of Aviation Strategy).

This is the first time that it has been possible to look in detail at capacity a year ahead, as opposed to just a couple of months. Care was taken to exclude double counting caused by code–share and block booking agreements.

Of course, there is absolutely no guarantee that the services being advertised for the summer season and beyond will actually materialise. In fact, it is likely that the airlines will have to moderate their plans. Otherwise, the uneasy state of price discipline that now prevails will disintegrate.

In summary, its appears that overall capacity growth in 1999 will be around 9% — but with wide variation between the various route regions, as detailed in the following pages.

North Atlantic

This is the critical region for the profitability of the Euro–majors. ASKs are forecast to increase by 11.4%. This is not too far out of line with last year’s traffic growth rates — 8% for AEA carriers and around 12% for the US Majors — but nobody should expect 1998 increases to be repeated this year as economies on both sides of the Atlantic weaken.

There is a huge contrast in the strategies of the Euro–majors. British Airways has emphasised its restrained strategy (capacity growth of 4.5%) based on downsizing from 747s to 777s, although its US partner American is still growing at well into double digits and now equal third in terms of size on the Atlantic. British Airways is obviously frustrated by the failure to consummate its full alliance with American, but as a result it still enjoys the regulatory protection of Bermuda 2; it can afford to cut capacity growth with minimum risk to market share.

Lufthansa by contrast, now operating in an open skies environment, is going for a higher risk expansion policy (capacity growth of 20%), adding destinations and frequencies as well as converting 747–400 Combis to full passenger configuration. Its strategy is officially described as “catching up” after years of expanding at about half the rate of British Airways. Its partner United is growing at a similar rate.

Air France in conjunction with its code–sharing partners Delta and Continental is also being fairly aggressive on the Atlantic, increasing capacity by about 15%. It claims that this summer it will be able to offer daily service to 89 points in the US as opposed to 36 at present.

It is a recurrent pattern that the former state–aided Euro–majors, now freed from the shackles of their EC–ordered turnaround strategies and injected with private capital, are going for fast growth on the Atlantic, Alitalia is adding 34% to its capacity, Sabena 28% and Iberia 41%.

Europe-Asia

By contrast, most airline are being very cautious on Asia–Pacific routes, with British Airways, Swissair and Virgin actually cutting capacity, so that overall capacity growth is estimated at about 3%. Traffic growth on this route region was about 4% last year for the AEA carriers.

Again though Lufthansa is being expansionist, pushing up capacity by nearly 14% (and bringing its share of this market up to equal that of BA), while its regional partner SIA is adding 13%. Thai apparently is increasing capacity by 21%, a move which we simply don’t understand.

Pacific

In the Pacific market a shift in the balance of power is taking place. The two US giants in this region, United and Northwest, are retrenching, Northwest in particular is reacting to the decline in traffic (estimated at -7% for the US Majors last year) by cutting capacity by nearly 11%.

By contrast, American, Continental and Delta are seizing the opportunities offered by the new US–Japan bilateral. American has more than doubled its shares of this market with a planned 184% capacity expansion this year; Continental and Delta are increasing capacity by 122% and 55% respectively.

Cathay Pacific is making a brave attempt to grow out of its problems with a significant increase in frequencies to the US west coast and New York. But SIA is cutting capacity by 4%, an almost inconceivable move just 18 months ago.

Because of the huge expansion of some of the US carriers on this route and the continuing growth of the Japanese airlines (also see Aviation Strategy, March 1999) total capacity increase is theoretically going to be more than 9% this year. There is no evidence that conditions on the Pacific have changed sufficiently to support anything like this level of capacity increase.

Mid/South Atlantic

Just as the US Majors have come to completely dominate North–South American routes, so European carriers are taking over South and Mid Atlantic routes. Last year the AEA airlines increased capacity by 14% on these routes although traffic growth was just under 12%.

All the Euro–majors have ambitious plans for this region, despite the warning of various economic crises. Especially notable is Iberia’s planned growth of 32% now that it has linked up with British Airways and American and is freed from the constraints of the EC–approved recapitalisation.

Well-laid alliance plans

Finally, the analysis provides an opportunity to review the relative positions of the global alliance groupings (see table, below). Under the ASK measurement oneworld comes out slightly ahead of Star both globally and on each of the route regions. And oneworld is expanding marginally faster than Star.

In comparison Wings and Atlantic Excellence are significant smaller entities (indeed as the name indicates Atlantic Excellence is not really a global alliance at all). This is where unaligned Air France now assumes strategic importance: integrating it into either of the two smaller alliances would create a grouping that — on size at least — would be close to Star and oneworld.

Overall, what is emerging is a very delicate balance between planned capacity and demand. On the demand side there is the obvious worry that that the industry is moving into a down–cycle, but the question also needs to be asked whether airlines have become a bit too complacent about the possible repercussions of the very nasty little wars that are now taking place in Europe.

Certainly, it is worth noting the title to Halstead’s analysis: the quotation from Robbie Burns, “The best–laid schemes o’mice and men gang aft a–gley”. Indeed,thay dae.