U.S. airlines are reducing their capacity through the end of the year to address an oversupplied domestic market that has led to lower fares and reduced profits despite strong travel demand. For passengers, that could mean higher fares are on the way.
Over the last week, airlines had one of the industry’s largest week-over-week capacity reductions, shaving almost 1% off their planned capacity for the fourth quarter, according to a financial institution. Airlines now expect to grow flying about 4% year over year during the final three months of the year.
Airline executives have noted strong demand but a domestic market that’s awash in flights, forcing them to dial back growth plans, which could drive up fares. The latest inflation report showed airfare in June fell significantly from a year earlier and from May.
Reducing capacity could drive up fares for consumers and boost airlines’ bottom lines if travel demand holds up. Getting fares in the market that are profitable to airlines but palatable to consumers is crucial as consumers have pulled back on spending in other areas.
The industry’s performance compared with a major stock index. Third-quarter outlooks from major airlines earlier this month disappointed investors, but their executives said they expected capacity pullbacks across the U.S. industry to materialize in August, helping results. One airline forecast a potential drop in third-quarter unit revenue, a measure of how much money an airline brings in for the amount it’s flying. The airline recently announced it will finally ditch its iconic open-seating model and introduce extra-legroom seats to drive up revenue.
Another major airline recently reported a significant decline in its second-quarter profit and said it plans to dial back its capacity growth in the coming months, expanding less than 1% in September over last year.
Excess capacity led to more discounting activity in the quarter than anticipated. Overall, the airline plans to grow 3.5% in the second half of the year after expanding about 8% in the first six months of the year.
Low-cost and discount airlines have been more aggressive in cutting unprofitable routes and scaling back capacity. Those carriers plan to contract 2.2% in the fourth quarter from the same period of the previous year, the financial institution said.
One low-cost airline, for example, has culled money-losing routes this year and deployed aircraft to more popular city pairs. The carrier is scheduled to report results soon.
Another budget airline warned of a wider-than-expected loss for the second quarter after nonticket revenue, which accounts for fees like checked bags and seating assignments, came in lighter than expected.
