Six Major Airlines Anticipate Growth in 2004

November 30, 2003

Fort Worth Star-Telegram – Texas

FORT WORTH - After more than two years of cutting flights, slashing schedules and parking airplanes, the nation's major carriers are poised to grow once again.

The six largest carriers are expected to increase seating capacity by as much as 4 percent next year, analysts said. Some of the most aggressive growth will be at Fort Worth-based American Airlines, which is expected to increase its capacity by 7 percent in 2004, including its mainline routes and its American Eagle regional subsidiary.

The growth is primarily a result of economic improvements, competition against low-fare rivals and increased international traffic.

But the expansion is also likely to spur more competition, keeping fares at some of the cheapest prices in decades, analysts say. While a boon to travelers, continued low fares will be a serious challenge to airline executives who are desperate to bring in more money.

"This kind of growth is going to assure that [airfares] are maintained at their present, unsatisfactory levels," said Morton Beyer, an airline industry analyst and consultant at the Morton Beyer & Agnew consulting firm in Arlington, Va. "I don't see much relief coming in that area."

Analysts predict that the major airlines will grow anywhere from 2 percent to 4 percent next year. Low-fare airlines, such as Dallas-based Southwest Airlines, are expected to expand more than 10 percent next year, and small regional airlines will probably grow more than 30 percent.

It's a stark contrast from the days after Sept. 11, 2001, when the major airlines slashed their networks by as much as 20 percent, announced widespread layoffs and spoke of permanent reductions.

Since 2000, American has only increased its overall capacity once, in 2001, when it grew by about 8.5 percent. That figure was boosted by the acquisition of TWA, which accounted for about 20 percent of American's growth that year, spokesman Al Becker said.

This year, American forecasts that it will shrink about 4 percent.

But next year, the carrier -- the world's largest airline -- will grow as much as 7 percent, according to airline officials.

American executives emphasized that the buildup won't follow the traditional pattern of adding more flights, more airplanes and more costs. In fact, the carrier will grow despite removing 57 aircraft from its fleet.

In a conference call with analysts, Chief Executive Gerard Arpey said that the 2004 growth "is going to be among the most efficient capacity we've ever put out there." He added that he is "pretty excited about the operating plan we are building generally for next year."

Henry Joyner, American's vice president for planning, said three factors are driving the airline's growth:

• Adding seats to about a quarter of American's fleet as the airline scales back its "More Room Throughout Coach" program.

• Restoring international flights that were cut in the spring following the start of the war in Iraq and the SARS outbreak in Asia.

• More efficient use of American's fleet, with the cutbacks at its hub in St. Louis, flights shifted to Dallas/Fort Worth Airport and Chicago, and streamlining of hub schedules. Airplanes will spend more hours each day in the air, adding to American's capacity without having to add aircraft.

"This is a very prudent plan with very attractive economics," Joyner said.

American and other major carriers are also reacting to the steady growth of low-fare rivals, analysts say. During the past few years, whenever a major airline has pulled flights from a market, discount carriers often jump in, grabbing market share and pushing down fares.

To hang onto their dwindling market share, the traditional carriers must hold their ground, analysts say.

American, for example, is adding seats on transcontinental flights where it competes heavily with discounter JetBlue Airways.

"These planes will be strategically deployed to markets where we are probably spilling traffic today," Arpey said.

According to a recent report by Deutsche Bank Securities, low-fare airlines will have 20 percent of the total air-travel market by the end of next year, compared to 14 percent in 2001.

The six largest carriers, meanwhile, will see their market share drop to 73 percent from 83 percent in 2001.

"Looking ahead, we expect there to be a noticeable shift in the U.S. airline industry," wrote Susan Donofrio, Deutsche Bank's airline analyst, in the report.

One important question is whether the growth will push down airfares or keep them at their present, historically low level.

Traditionally, increased airline capacity means that carriers compete more for passengers and that airfares tend to fall. Beyer believes that this makes it unlikely that fares will rise next year, making it more difficult for the large carriers to improve financially.

"I'm not overly optimistic," he said. "This is going to make it harder to recover next year."

But Joyner of American Airlines counters that if the economy continues to improve, travel demand will rise and match the projected growth.

"There's a concern because there is some risk that pricing will be challenged," he said. "But as we think about our own growth, we think our level is pretty prudent."

Michael Boyd, an airline consultant with Boyd Group, based in Evergreen, Colo., said he believes that the growing economy will prevent another free-fall in airfares, even with the airlines adding seats.

"It's very likely the airlines will be very careful and add what they have to meet their core demand," he said. "I don't think they're going to throw excess seats out there.