Airline Capacity Challenges

Implications: -Airlines have reduced capacity significantly in the post 9/11 environment

-Load Factors have improved significantly

-Low cost start up airlines provide constant competition

Analysis: AMR's plan to reduce capacity by 1% certainly makes some good business sense.  However, capacity on most lane segments is already tight, so efforts to increase rates may make more sense than reducing capacity.  Competitors are always looking for opportunities to increase capacity in lanes where carriers reduce capacity.

Moreover, the success of the low cost start up carriers has created a new breed of competition keeping price pressure on the large legacy carriers.  The best opportunities for the large carriers seems to be in expanding in the growing international markets, especially the Pacific Rim.  Here the high load factors on business and even first class travel provides significant yield expansion opportunities and seems to provide a stronger strategy than reductions in capacity.