Amid a stagnant economy, airlines are increasing capacity

On the surface, things are starting to look up for the international airline industry after several years of bad health. Rising average airfares as well as a growing desire to travel in order to…

Amid a stagnant economy, airlines are increasing capacity

On the surface, things are starting to look up for the international airline industry after several years of bad health. Rising average airfares as well as a growing desire to travel in order to mark the passing of years are increasing business in the industry.

How would you feel if your favorite airline was raising the price of your flights even as it increases its capacity?

Compared to the prevailing highs, fares are still stabled and falling industrywide, according to recent data from the International Air Transport Association (IATA). The volume of traffic, however, grew considerably in 2018, and is expected to continue at the current rate for the rest of this year.

Airlines are putting these gains on an even stronger footing by increasing capacity. Currently, 3 percent more seats are being served by airlines than last year, IATA reported. However, much of this growth isn’t in places where demand is highest. It’s mostly being supplied by airlines who are responding to competition.

It’s more than just increased competition — fuel costs are rising. IATA is estimating that jet fuel prices will average nearly $80 per barrel this year, compared to $61 per barrel of 2017. The trade war between the United States and China is also increasing this cost, but it’s unclear what impact this will have on airlines because fuel prices actually trail demand; it tends to be more difficult to predict where jet fuel prices are going than where the economy is heading.

As capacity is increasing, profitability and earnings are declining. IATA estimates that airlines will make a little more than $5 per passenger carried. While that’s higher than 2017, IATA expects profits this year to decline by 20 percent, bringing in a total profit of only $20 billion. Last year’s overall profit of $24 billion was a record, and very similar to 2016′s. In addition, airlines are steadily cutting capacity by offering cutbacks on outbound flights or turning off individual bathrooms and expanding the size of the sink.

With all of this in mind, executives are continuing to cut costs so that they can offer an offer that people want to buy. Since customers travel to experience places where they don’t usually spend money on themselves, airlines should be cutting costs to make themselves appealing to and accessible to customers who want to spend money, not just to get people to pay them to travel. That’s what makes the airlines a good business — and it’s a good reason to think about investing in them.

Of course, consumers don’t always choose where to travel based on economy fares. For example, business-class flights might be more comfortable than coach on most flights, but if a business-class airline isn’t making its profits there, it’s probably not worth investing in its stock.

However, with 80 percent of flights being driven by business or leisure travelers (with few connecting flights), it’s unclear where the market goes next. In general, though, airlines that are focused on their core business or that will have the most consistent market performance will be the ones that succeed through this transitional period.

That’s not to say that airlines that are only focused on the next hot destination will do well. Business aviation, which makes up less than 1 percent of all international flights, will experience the impact of rising fuel costs and global uncertainty when it comes to airplane orders. Demand for these flights also fluctuates with the economy, but business aviation is typically more stable and less competitive.

At the same time, airlines that are operating at full capacity won’t be affected as much by any additional growth in demand. Plus, airlines that operate in mature markets will also have a better shot at success if they don’t try to match the price of what they have been able to charge previously. Flights in growing markets with large numbers of passengers are easier to be profitable, and there will be less room for both incremental price increases and for airlines who try to put price above the need to make a profit.

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