Will Your Airport Have Fewer Flights in the Future?

Last month, I pointed out a growing trend in the U.S. airline industry toward "upgauging": replacing smaller planes with larger ones. Virtually every airline has become enamored with the potential cost benefits of switching to larger aircraft. They are almost always more fuel efficient and more labor efficient since they allow the airlines to spread costs over more potential passengers.

From a passenger perspective, the upgauging trend could lead to lower ticket prices if the airlines pass most or all of their cost savings through to customers. This would obviously be a nice benefit for consumers.

However, as the average plane size increases, airlines are likely to maintain capacity discipline by cutting back on the number of flights they offer. Small and medium cities are likely to bear the brunt of this industry shift, as airlines may offer fewer flights on larger planes rather than more frequent service on smaller aircraft. Consumers will be much less pleased with this change.

Unintended consequences?
As I detailed last month, virtually every major U.S. airline is participating in the upgauging trend. Some, like JetBlue Airways (NASDAQ: JBLU  ) , are expanding their fleets with larger aircraft than they have previously flown. Others, including Alaska Air (NYSE: ALK  ) , are retrofitting existing planes to fit more seats onboard. Southwest Airlines (NYSE: LUV  ) is doing both of these things! Others, like Delta Air Lines (NYSE: DAL  ) , are buying larger planes to replace smaller ones that are being removed from service.

However, airlines will not be happy if they find that they need to drop ticket prices in order to fill their (larger) planes. This would jeopardize the return on investment for these aircraft. "Capacity discipline" has become a universal talking point for airline executives, and the industry as a whole has been fairly diligent about matching capacity to demand for the last several years.

There is only one way for airlines to keep overall capacity in check while the number of seats on each plane grows. They will need to cut down on the number of flights offered. While this would offer customers less choice, airlines will be drawn to this option by the need to limit capacity growth.

An example
Memphis is a city that has already been hit hard by this logic. When Delta and Northwest merged five years ago, the two offered a combined 238 daily departures from the Memphis hub. Today, that has been cut to just 94 daily departures. While Southwest recently announced plans to enter the Memphis market later this year with flights to five destinations, that is a small consolation for Memphis residents.

At an investor conference last fall, Glen Hauenstein, Delta's executive vice president for network planning and revenue management, explained the logic of downsizing in Memphis. Instead of running small regional jet flights from a city like Birmingham to both Memphis and Atlanta, Delta will in the future direct all of its traffic to the big Atlanta hub using larger planes. Offering fewer flights on larger planes is more cost-efficient for Delta.

Industry shake-up
As airline fleets converge toward larger planes, small cities will continue to see a reduction in flight options. Among the network carriers, smaller hub cities like Memphis, Cincinnati, and Cleveland are likely to see the biggest cutbacks. Low cost carriers may reduce frequencies for lower-traffic routes while fitting more passengers on each flight.

On the other hand, if you live in a large metropolitan area with a busy airline hub, such as New York, Chicago, Dallas, or Atlanta, you may see better flight options in the future. As capacity becomes more concentrated in the biggest markets, airlines will offer more flights on larger planes in those cities. This trend could lead to somewhat lower prices and more available itineraries.

Great transformation
The upgauging trend will take years to fully unfold, as airlines tend to replace only a small proportion of their fleets each year. However, by the end of the decade, today's small hubs may have disappeared, but large hubs will be even bigger, while accommodating larger planes (on average).

This shift will have the greatest effect on small-town America. Small cities which today have flights to several different hub airports will not be able to support as many flights on larger aircraft. Customers are therefore likely to have fewer choices in the future, with flights to just two or three big hubs becoming the norm. Unfortunately, this reduction in consumer choice may be the price of having a profitable airline industry.

Are you part of the 99%? The Motley Fool's new free report highlights three less-than-luxurious stocks the 1% may be overlooking. Just click here to read it now.

Read/Post Comments (3) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

  • Report this Comment On May 11, 2013, at 12:00 PM, saonenotary wrote:

    There will also be drastically fewer pilots because pilots from the Korean and Vietnam wars are retiring (retirement age has already been extended once) and not many new pilots coming up in the ranks. And also fewer tower/controllers because of federal cutbacks! Both of these will reduce flight available regardless of plane size!

  • Report this Comment On May 11, 2013, at 12:15 PM, TMFGemHunter wrote:

    Yes, there are a lot of pilots retiring. I think that will probably drive up competition between mainline carriers and regional airlines for pilots. That's another reason why 50 seat (and smaller) planes are going to become less economical to operate.


  • Report this Comment On May 14, 2013, at 6:38 AM, gkirkmf wrote:

    Sounds like there is an opening for light rail to step in to the transportation arena over a larger part of the country (northeast coast excepted) where the economics make sense.

Add your comment.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2421319, ~/Articles/ArticleHandler.aspx, 9/26/2016 6:37:16 AM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 days ago Sponsored by:
DOW 18,261.45 -131.01 -0.71%
S&P 500 2,164.69 -12.49 -0.57%
NASD 5,305.75 -33.78 -0.63%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/23/2016 4:02 PM
ALK $65.77 Down -0.27 -0.41%
Alaska Air Group CAPS Rating: ***
DAL $38.78 Up +0.28 +0.73%
Delta Air Lines CAPS Rating: ***
JBLU $17.27 Down -0.03 -0.17%
JetBlue Airways CAPS Rating: ****
LUV $37.24 Down -0.09 -0.24%
Southwest Airlines CAPS Rating: ****