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ERJ170
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US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 3:27 am

I just want anyone's opinion on this..

In a USA Today article.. Southwest, American spar over airport, it states that if US and HP merge and shed ~50 aircraft.. then the problem with overcapacity will be relieved..

The chief executives of two major airlines say a merger of US Airways and America West could help the struggling industry if some of US Airways' planes are grounded, which would reduce the supply of seats.

Southwest chief executive Gary Kelly said if the two carriers merged and shed 50 of US Airways' planes, it could represent the consolidation that many experts have long predicted for the industry. "


but in reality, if US shed 50 planes and.. say.. drop 2 frequencies from 10 destiantions.. wouldn't another airline just add another frequency or 2 to compensate? Say US drops LGA-FLL, PHL-ORF, DCA-IAH.. and HP drops PHX-RDU, PHX-FLL, PHX-LAX.. don't you think AA, WN, DL, B6... somebody wouldn't just add more frequencies.. so would there actually be an advantage to US dropping fleet?
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cltguy
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RE: US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 3:48 am

USAirways could entirely shut down and that would not solve the so called "capacity" problem...which in my opinion there is no capacity problem...its a fuel cost problem...and SWA since they hedged their fuel cost is able to drive everyone else's fare prices down. If SWA had not hedged...then all the fares would be high enough that just about every airline would be turning a profit at this point.
 
zvezda
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RE: US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 3:52 am

Quoting Cltguy (Reply 1):
its a fuel cost problem...and SWA since they hedged their fuel cost is able to drive everyone else's fare prices down. If SWA had not hedged...then all the fares would be high enough that just about every airline would be turning a profit at this point.

Were that true, then WN would be making $billions now.
 
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ERJ170
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RE: US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 4:01 am

What is killing me is that all of these airlines are applauding the drop of 60 planes from the combined fleet.. yet, I bet you that before those 60 aircraft are gone, those same airlines will be adding capacity. Look at what WN did when ATA dropped their fleet number down. They jumped right in and added capacity. So much for downsize to solve the overcapacity problem.

If I were the federal government (which I am not, but oh well)... I would put a 3 month hold on an additional frequencies on current routes that US/HP drop.. frequencies can be added to new, non-served routes.. but not on already served routes.. that way the capacity issue could truely be investigated.
Aiming High and going far..
 
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yyz717
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RE: US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 4:30 am

Quoting Cltguy (Reply 1):
USAirways could entirely shut down and that would not solve the so called "capacity" problem...which in my opinion there is no capacity problem...its a fuel cost problem...and SWA since they hedged their fuel cost is able to drive everyone else's fare prices down.

I agree in part. I also argue there is no capacity problem since load factors are high with all airlines. It's a cost problem (not just a fuel problem).

If a major liquidated, capacity would drop 5-18% overall and yields would rise.
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mrniji
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RE: US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 1:20 pm

Quoting Yyz717 (Reply 4):
If a major liquidated, capacity would drop 5-18% overall and yields would rise.

But Neil, don't you think that this is another indicator for a capacity problem? I.e. too much competition (and need to compete with too cheap prices), too low prices, too less revenue etc (people travelling "too cheap" in order to be profitable).. - loads might be high, but what does this help if returns to investment and break-even point are not met?
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atmx2000
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RE: US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 1:47 pm

Quoting ERJ170 (Reply 3):
What is killing me is that all of these airlines are applauding the drop of 60 planes from the combined fleet.. yet, I bet you that before those 60 aircraft are gone, those same airlines will be adding capacity. Look at what WN did when ATA dropped their fleet number down. They jumped right in and added capacity. So much for downsize to solve the overcapacity problem.

If you can increase capacity and remain profitable, there is no reason not too. If you can't maintain capacity and be profitable over the long term, you need to do something or risk going under.

Quoting Yyz717 (Reply 4):
I agree in part. I also argue there is no capacity problem since load factors are high with all airlines. It's a cost problem (not just a fuel problem).

It's a pricing power problem at the current cost level. Loads are high, because airlines are trying to minimize their losses by maximizing revenue, but getting to the point where one could charge prices that would cover costs is impossible with current capacity levels. Reduced fuel prices would help, as would other means of cutting costs and increasing efficiency.
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Tango-Bravo
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RE: US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 2:13 pm

Quoting ERJ170 (Reply 3):
If I were the federal government (which I am not, but oh well)... I would put a 3 month hold on an additional frequencies on current routes that US/HP drop.. frequencies can be added to new, non-served routes..

...and that would be blatant, arbitrary re-regulation imposed upon a de-regulated industry.

Quoting Atmx2000 (Reply 6):
It's a pricing power problem at the current cost level. Loads are high, because airlines are trying to minimize their losses by maximizing revenue

It is not a pricing power problem but rather a pricing discipline problem. And how does an airline maximize revenue by minimizing fares? ...seems like a non-sequitor to me; like airlinespeak emanating from the yield mismanagement department of a U.S. legacy airline.
 
atmx2000
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RE: US/HP Merger Relieve Overcapacity?

Fri May 20, 2005 2:22 pm

Quoting Tango-Bravo (Reply 7):
It is not a pricing power problem but rather a pricing discipline problem. And how does an airline maximize revenue by minimizing fares? ...seems like a non-sequitor to me; like airlinespeak emanating from the yield mismanagement department of a U.S. legacy airline.

If you raise prices and passengers switch to your lower priced competitor or choose not to fly, you decrease your loads, while potentially increasing your competitors loads. Depending on how elastic demand is and how much capacity is on the route and the pricing delta between competitors, an increase in price could lead to a large enough reduction in loads that results in no increase in revenue.
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goingboeing
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RE: US/HP Merger Relieve Overcapacity?

Sat May 21, 2005 2:53 am

Quoting ERJ170 (Reply 3):
What is killing me is that all of these airlines are applauding the drop of 60 planes from the combined fleet.. yet, I bet you that before those 60 aircraft are gone, those same airlines will be adding capacity. Look at what WN did when ATA dropped their fleet number down. They jumped right in and added capacity. So much for downsize to solve the overcapacity problem.

Seems to me that a non bankrupt carrier should be allowed to add as much capacity as they want - especially an airline that can turn a profit with a 69% load factor. Bankruptcy courts and third parties (GE) propping up failing airlines hurt the industry worse because in order to get those magnificent 90+% load factors, they are selling tickets at fire sale prices.
 
luv2fly
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RE: US/HP Merger Relieve Overcapacity?

Sat May 21, 2005 3:30 am

Quoting Goingboeing (Reply 9):
Seems to me that a non bankrupt carrier should be allowed to add as much capacity as they want - especially an airline that can turn a profit with a 69% load factor. Bankruptcy courts and third parties (GE) propping up failing airlines hurt the industry worse because in order to get those magnificent 90+% load factors, they are selling tickets at fire sale prices.

Could not agree more.....
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DAYflyer
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RE: US/HP Merger Relieve Overcapacity?

Sat May 21, 2005 3:33 am

50 aircraft is hardly relief to overcapacity. It's an eyedropper full in a swimingpool of overcapacity. US/HP would have to fold entirely to reduce the overcapacity.
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srbmod
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RE: US/HP Merger Relieve Overcapacity?

Sat May 21, 2005 5:18 am

I think some routes that both airlines currently operate in competition with 2 or 3 other airlines may see some cuts that will come via a/c retirements. Not all of the capacity cuts will be via a straight axing of flights, most of it will come from downsizing the a/c on the route. Look to see some 737 routes of both airlines get dropped to regional jets. I'll use ATL for my example. By the time this merger will be consumated, ATL-CLT, ATL-PHL, ATL-PIT, ATL-DCA, and ATL-LAS will have three carriers on them (A merged HP/US, FL, and DL). All of US's flights on ATL-PIT and ATL-DCA are currently run by regional affliates; ATL-PHL for them is a mix of mainline and regional (Mesa and Mid-Atlantic), and ATL-CLT is down to one mainline flight and 6 USX flights (PSA and Mesa). I look to see all of the US flights to ATL dropped to US Airways Express. ATL-LAS is down to one flight a day for HP, and DL has 7 flights a day on the route, and FL is about to go to 4 flights a day on the route. When it was just HP and DL on the route, HP had several flights a day on the route and dropped it down to two post 9/11 and eventually dropped it to one around the time FL started the route. I would look to see the lone ATL-LAS flight dropped, and possibly replaced with another ATL-PHX flight (unless FL enters PHX within that time).