22 October 2008

Oops - Cut Capacity, Raise Fares Strategy failed US Airlines

You would think that the significant cuts in capacity from Labour Day onwards would have given the airlines market pricing power and the ability to raise yields. But even with the wonderful drop in fuel prices the airlines just cannot seem to win for trying.

So what did they do wrong?

In my humble opinion the airlines didnt quite do the right thing. So I will ignore for the purpose of this piece the issue of Fuel Hedging that seems to have bitten many airlines.

What didnt go right?

1. The capacity cuts were not enough
2. The reduction in premium traffic was underestimated
3. Reducing the cheap seats inventory was too aggressive
4. The airlines didn't spend enough money in marketing during this time period to boost sales.

What is going to happen next?

Again in my humble opinion we are likely to see some clear further actions:

A) More total capacity cuts
B) A review of the capacity parked and the right sizing of the cuts
C) Opening the cheaper buckets more widely to start moving those numbers back up
D) More cost cuts especially staff
E) Conversely a slowing of merger activity.

Will I be right? You be the judge


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