More airline capacity cuts on the way

According to Bloomerg.com, citing data from OAG Aviation Solutions, the six largest US airlines will shrink seat capacity by 6.8 percent "by year's end from 2008 levels....capping the industry's deepest retrenchment since World War II." But airline experts believe that even larger reductions are called for.

Previous articles in other publications cited bigger cuts than those reported by Bloomberg, but we're presuming that the 6.8% cut is an average for the six airlines. A June 12 article in the Wall St. Journal reported that "by the end of 2009 [Delta's] total network capacity will be about 10% smaller than it was a year ago" and that "American, for its part, said the current difficulties would force it to trim capacity during the second half of the year by an additional two percentage points, meaning overall capacity by the end of 2009 will be 7.5% smaller compared with a year earlier."

A June 5, 2008 report by the AP said that Continental Airlines would cut capacity by 11 percent and that the airline would mothball 67 planes by the end of this year.

Airlines are cutting capacity in order to keep fares from dropping further. Yet according to Bloomberg, quoting American Express data, "Business fares, usually airlines' most profitable source of revenue, are at the lowest levels in six years," and, as anyone who reads the news knows, airlines continue to bleed cash.

Will they be able to shrink their way to profitability? That's far from clear (it certainly didn't work for GM or Chrysler). One thing is for certain: as the major airlines become smaller and smaller, it becomes easier for them to merge. That's because when two very large airlines attempt to merge, government antitrust watchdogs become alarmed. But as the airlines' market shares shrink, mergers between smaller players become more palatable.