"Airline chiefs disagree on best market strategy"

Thursday, May 17, 2007

Airline chiefs disagree on best market strategy 
By Dan Reed
USA TODAY


DALLAS - A surprising slowdown in the growth of demand for airline seats
this year had the CEOs of two major carriers squabbling Wednesday, albeit
indirectly, about how carriers should respond to the softening market.

The by-play between American Airlines' (AMR) Gerard Arpey and Southwest's
(LUV) Gary Kelly illustrated the budding predicament in which U.S. airlines
now find themselves. 

Based on booming demand in 2006 and their expectations of a continuation of
that trend, several U.S. carriers, led by Southwest, laid in plans to add
lots more seats and flights this year. 

But while demand is still up over last year, its rate of growth has slowed.
Coupled with the new capacity added to the nation's air transportation
system this year, that's making it hard for airlines to raise prices enough
to offset rising fuel and other costs.

So far, Southwest's Kelly is sticking with his plan to add about 8% to the
airlines' capacity this year, even though the growth of available seats
industrywide is limiting Southwest's ability to push its prices a bit
higher.

But American's Arpey, who entered the year expecting to tighten American's
supply of seats a bit in a bid to push up the average price paid by its
passengers, was indirectly critical of Southwest for sticking with its
aggressive growth plan, even as Kelly has complained publicly about the
financial effects of industry capacity growth.

"Look at who's complaining about poor revenue growth the most, and look at
their own (capacity) growth," American's Arpey told reporters after the
annual shareholders meeting of AMR, American's Fort Worth-based parent. He
didn't name a specific carrier. But Kelly has openly fretted about too much
capacity being added across the industry.

"We're not after bigger market share, like some. We're after bigger
profits," Arpey said.

Kelly, speaking with reporters in Dallas after his own shareholders meeting,
compared the current situation to instances in 1990 and 1995, when demand
surprisingly tailed off and Southwest continued growing. 

Though its profits were diminished somewhat, the perennially profitable
discount carrier was able to increase its presence in a number of markets
and to grab a bigger share of the overall domestic market.

"We are more prepared for this kind of soft environment than any other
carrier" Kelly said, pointing to Southwest's strong balance sheet and record
of profits. "We look at our ability to grow and our flexibility as a
competitive advantage when we see that some competitors are already reducing
service."

On top of the 35 new planes Southwest is receiving from Boeing this year, it
will add four used 737s to the fleet in 2007. But if demand softens further,
Southwest can moderate its growth by retiring older planes, Kelly added.

American has reduced overall capacity 3.7% so far this year, and 4.3% in the
domestic U.S. market as it has shifted some flying to more profitable
international markets.

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