Are airlines unfairly conniving to keep capacity low and thus drive up fares? According to Senator Richard Blumenthal, a Connecticut Democrat, they are—and he's asked the Justice Department to investigate.
Unfortunately for airlines and their passengers, Blumenthal has succumbed to a particular Washington, D.C., affliction: thinking he can run a business better than the people actually running it. If they had their druthers, Elizabeth Warren would moonlight as a banker, Joe Barton as a college sports administrator, Jay Rockefeller as an oil company executive, and Hank Johnson as a geographer.
Based on a New York Times report on an airline industry meeting, Blumenthal is concerned that “many of these [airlines] publicly discussed their strategies to remain ‘disciplined’ in their decisions to manage capacity across their flight routes.” He adds that “most airlines have traditionally viewed capacity reductions as a highly valuable way to artificially raise fares and boost profit margins.”
The use of the scare quotes on “discipline” is telling. Discipline is normally a positive word, as it connotes sound management and prudent behavior—precisely what the airline industry has needed as it continues the long shakeout in the era of fare deregulation.
First of all, capacity has not been reduced in recent years. As the chart below shows, since air travel demand contracted during the recession, capacity has slowly but steadily climbed. The difference is that it has not climbed as fast as during the go-go years of the mid-2000s, when investors thought a low-fare, no-connections airline based in Columbus and a flying version of Hooters were good ideas. As airline industry analyst Brett Snyder says: “You’re only as smart as your dumbest competitor. And there were plenty of dumb competitors out there who threw a ton of capacity into a market only to make everyone unprofitable.”
Notably, revenue passenger miles have climbed faster than available seat miles—meaning that airlines are getting better at filling seats on the flights they already have. Capacity’s not going down. The “discipline” airline CEOs talk about with investors is making better use of their capacity and expanding available seat miles when they sense the market truly calls for it. Meanwhile, airlines are using the savings from these efficiencies to make crucial and long-overdue investments in in-flight entertainment and fleet renewal—which will benefit customers (as well as the environment) too.