In a Dramatic Turn, The Domestic US is Probably the Best Market for Airlines in the World Right Now


It wasn’t all that long ago that airlines raced to get their airplanes out of the US as fast as possible. Flights within the US just weren’t earning their keep, and besides, there was a lucrative market beyond our borders just brimming with opportunity. But the tables have turned. Now, the domestic US market has become one of the best markets in the world for airlines.

To get an idea of just how good things are, you need to look no further than second quarter financial results. Those airlines that skew domestic did very well. Alaska posted an 18.3 percent operating margin. Southwest reported in with 16.3 percent. And even Virgin America just announced it had a very solid 11.4 percent margin during the quarter. The legacy carriers noted it as well, showing great gains in the domestic market.

Meanwhile, the international arena is seeing weakness. Delta has said it is bringing down capacity, and in fact, announced it would pull 4 fully-renovated 747s out of service. American has cut its international capacity growth plans toward the end of this year. All airlines are taking a hard look to see what makes sense. So how did this change so dramatically? In short, it’s just basic economics. There’s a lot of demand and airlines have resisted the urge to add supply.

Change in Flights Domestic and International

The chart above tells quite the tale. The number of domestic departures stayed flat from 2004 through 2007 while international departures grew significantly as airlines saw opportunity. But beginning in 2008, fuel prices spiked, the economy tanked, and fortunes changed dramatically. International departures first went flat and then plunged in 2009. Domestic departures started shrinking in 2008. By 2010, international departures were on the rebound while domestic departures actually never did. But this doesn’t tell the whole capacity story. When we look at available seat miles, things look a bit different.

Change in ASMs Domestic Intl

This chart doesn’t show nearly the same level of fall-off in domestic capacity after 2009 that we see when we look at the number of flights. Why is that? It’s because airlines are flying fewer airplanes, and they’re adding seats to the ones they still have. On the one hand, airlines are simply pulling regional flights out of the system. Many have become unprofitable since the rise in fuel prices, and that has led to route cuts and hub closings (eg Memphis, and very recently, Cleveland). In some cases, regional jets have been replaced with larger airplanes, so that offsets the decline. But there’s more than that.

On the mainline side, airlines have raced to add seats. Some of that is through simply using larger airplanes. US Airways, for example, has been replacing its 144-seat 737-400s with 187-seat A321s. The rest is from airlines adding seats to the airplanes that they have, often thanks to new thinner “slimline” seats. Southwest added a row to its 737s. United has added seats to its A319/A320 fleet. Delta is doing the same on several aircraft types. And American has big plans for that as well. In short, the number of flights has gone down but the number of seats has stayed relatively flat. That means the cost of producing each seat has gone down as well.

While this is going on, think about what the economy has been doing. Things have been steadily improving for awhile now, and the demand for air travel has picked up dramatically. We don’t have international fare data here, but take a look at the cumulative change in domestic fares since 2004.

Cumulative Change in Domestic Airfare

After some serious weakness in 2009 and 2010, fares have rebounded with a vengeance. While it should be noted that adjusting for inflation, fares have only increased 1.3 percent in that time… fares have actually kept pace with inflation! Consider that a victory in the airline world since fares have done nothing but drop since deregulation.

While fares have gone up, flights have also become more full. The change in domestic travel has been more pronounced than internationally since airlines have begun to vary their schedules better to match passenger demand.

Load Factors Since 2004

All of this adds up to good times for airlines flying domestically. Seats are being produced for less, and they’re being filled at record levels. Meanwhile, fares are going up. But are the times too good? When airlines start turning in great margins like this, others begin to prey. Spirit and Frontier already see blood in the water. Spirit in particular is growing and sees plenty of opportunity. When the fare canopy gets this high, it opens up opportunity for others to come in underneath and make a nice living.

We haven’t seen many start-ups lately but it wouldn’t shock me to see more in the works. Whether they actually get airborne is a whole different story, since by the time that happens, we’ll probably be in another down cycle. But in the domestic market, times are really good right now. Let’s see how long it stays that way.

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24 comments on “In a Dramatic Turn, The Domestic US is Probably the Best Market for Airlines in the World Right Now

  1. Is all the international data for U.S. based carriers only, or is it for all carriers which fly international to the U.S., including foreign carriers?

    1. The international carriers provide onboard data (load factor, seat, enplanements, cargo, etc.) on the flights touching the US. The international carriers do not report fare or O&D data.

      You might see some international carrier fare data in the BTS data. This is largely due to a domestic carrier ticketing the flight. The subset is so small it is not usually statistically significant.

  2. I don’t see so much a market for start-ups, so much as you said more room for Frontier/Spirit to come in and start adding routes besides the typical trunks/seasonal. There may be enough demand, and enough capacity restriction, to allow the addition of flights between more mid-size city pairs. In that sense I think Virgin America is probably in the best position it could be in for an IPO, because demand coupled with capacity discipline is allowing for flights to be flying relatively full for everyone, even if your business plan is weak. That may be enough to be able to get them off the ground before things go up in smoke.

  3. Are the airlines getting smart in their old age and finally figured out they don’t have to do everything the other guy does? And finally figured out that one flight with 150 people on it is better then three flights with a combined total of 150 people? I’m sure the list can go on and on how airlines could have been helping their wallets all these years but kept up the stupid ‘do everything the other guy does’ motto.

  4. The legacies may have been adding seats via slimlining, but they also removed seats for their E+ style seating that UA pioneered (now copied by CO as part of UA, as well as AA and Delta).

    1. True, but airlines have also pushed rows closer together to make up for the e+ seats. 32″ pitch used to be the norm in coach. Now it seems that you’re lucky if you get 31″ and I believe Spirit squishes you in with a 29″ pitch

    2. Oliver – Good point on the E+ additions, but it’s not all that way. It’s interesting to look at the Delta/Northwest A320s. As Northwest, it was 16F/132Y or 148 total seats. With Economy Comfort at Delta today, it’s 12F/18Y+/120Y or 150 total seats. Sure there are fewer seats up front but still 2 more overall. But now it’s going to 16F/18Y+/126Y for a total of 160 seats.

  5. It doesn’t take a genius to figure out that domestic is where the profits are when a ticket to Louisville costs the same as one to London. That said prices are hitting a ceiling where there is demand destruction. Overall fares may be sticking with inflation but are people’s incomes? I know many families that have opted for the road trip over a flight this summer. Meanwhile walk-up fares are sky high. Almost 100% of my business flying is next day or two day advance purchase and, yes, that flight to Louisville has been $1800 before. I’ve had meetings go as Webex just because there were no $500 flights to get everyone in the same room.

    1. I’m sure that $1,800 seat was worth it to enough last minute fliers. Part of the reason the price is there is to keep the seats available for those who really really want to fly.

  6. From the: “Gosh, so much data, but I want more data!” department.

    Are more people travelling?

    –1. large corporate business folks?
    –2. small business people?
    –3. government travelers?
    –4. private travel by US citizens–travel that isn’t totally discretionary, only when the travel must be taken by?
    –5. private travel by US citizens–travel that is purely discretionary, like vacation, pleasure, entertainment, or something taken where private autos could be used just as easily?
    –6. travel by overseas travelers? Isn’t there a tremendous increase in this travel currently?

    What fares are each types of travelers paying? Full fare? Discounted? Negotiated contract” Is the loss of US dollar buying power having any effect on international travelers filling up domestic seats? If so, is this having any impact on fares we (US citizens) are paying domestically?

    Interesting too, I think, aren’t most trips airline trips being more and more fared as two 1-way, each way fares (maybe discounted/maybe not), not as the round-trip, Saturday night stay, discounted fares we used to see. If true, does this mean anything?

    Another thing that intrigues me, is the up, up, up cost of rental cars. Today, another email from a major, large rental car company pushing a special on standard cars, $275.99 a week. When you add on all the fees and stuff, you’re looking at $400 a week, a car. Wow!

    The fact that rental car prices are getting so high (my opinion), does this have impact on how airlines are pricing their seats? Does airline pricing have any impact on rental car prices? Does one affect the other in these times?

    1. JayB – I think most of the data you want is not publicly available. I’ve tried unsuccessfully to find corporate share before, but they keep it locked up pretty tight. Certainly there’s no way I know of to find bookings by citizenship either.

      The fare break, buying 2 one ways vs a roundtrip, doesn’t impact the data, fortunately.

  7. And international capacity has been added by foreign airlines. Massive expansion by Korean Air, Air China, Hainan, EK, EY, QR, and TK in the USA has expanded capacity internationally. TK JFK-IST is now 3x daily in the summer which has kicked UA off EWR-IST and reduced DL to summer seasonal.

    It’d be interesting to see how the combination of upgauging, fuel prices, pilot rest rules have in total affected domestic service to small airports as well as frequencies on the major routes.

  8. With the “fare canopy” so high I’m wondering why Spirit and Frontier the only ones taking advantage. Take my home airport CVG as an example. Historically high fares. DL is not putting up the fight it used to to defend the turf. Frontier has moved in with flights to DEN and Trenton and is running full flights. Allegiant is cherry picking and cashing in. AA/US and UA are already here with multiple flights to all their hubs. Why aren’t they upgaging to mainline and cherry picking routes like the smaller players? IMHO, LAX and SFO are under served here as well as PHX even though Allegiant just announced they are going to start service to Mesa. This is all at an airport that big bad Southwest won’t fly into because of a tiff they had with the airport board years ago so you wouldn’t even need to compete with them. There’s money to be made in flyover country with some point to point cherry-picked routes.

    1. Wouldn’t mind seeing a few more nonstops to NYC area either. The times I’ve flown, with 2+ weeks advance booking, it’s been $700+.

      I think the biggest knock against CVG, though, is that its hub design makes it a pain to get in/out of as an O&D pax, and it’s far enough south that it’s not very convenient for those in the wealthy northern burbs.

      If you live or work in Blue Ash, for example, DAY is about as convenient timewise (door to gate) as CVG.

  9. Maybe more of the internationally configured widebodies will be flying some domestic routes.

    The more the big 4 have a big pricing umbrella, the more opportunity they create for growth by Frontier, Spirit, and also JetBlue and Virgin America. And Alaska.

  10. I fly 95% of the time domestically and, although I know it is anecdotal, nearly all of my flights are full or close to it.

    It will be interesting to see how big data and business intelligence affect routes going forward. Airlines are (or will be soon) ramping up their predictive analytics departments and will have much better input on what routes will be profitable before they are even launched.

    1. The fact that the flights are full doesn’t mean they are necessarily profitable. All the flights are full because airlines have gotten really good at revenue management and prediction – setting prices such that they will fill the flight at the highest revenue that will fill the flight. On Wednesday morning that may be full of cheap fares, and Friday afternoon full of high fares, but all fly full these days.

      One interesting phenomenon we are seeing is ever greater schedule variability. Can the airlines effectively manage daily capacity and revenue in unison? On some days I find the schedule on my preferred carrier so unattractive that I book with their competitor. I don’t know whether the people who create the schedules are measured on revenue.

  11. I blame the series of mergers. Less competition means more capacity discipline and less seats available. Great for stockholders, bad for passengers.

    1. Not that bad. Fares have only gone less than 2% on an inflation adjusted basis, and tickets were considered cheap at the basis comparison point as well.

      We could continue to get cheap fares, but that’d have to come out of someone’s pocket. That pocket might be investors, lenders, or the safety professionals that fly on the flight with you.

  12. Which CPI index or GDP deflator did you use to come up with the inflation adjustment?

    Anyway, this is only going to encourage imitators of PeopleExpress 2.0. Whatever happened to Eastern 2.0?

  13. I used to love to fly. I’d book weekend trips on short-haul (2 hrs or less) flights for short getaways. But, I’m 6’2″. These “slimline” seats have the feel of sitting on bare metal about about 45 minutes. And thanks for the airlines’ frenzy to cram more seats in its planes, the seat pitch is now UNCOMFORTABLY tight – and that’s even before the moron in front of me slams his seat back into “full recline” the moment the wheels are off the pavement. These days? I still love to travel, but I usually take advantage of local cheap rental cars and DRIVE. Flying *sucks*.

  14. “””””UNCOMFORTABLY tight – and that’s even before the moron in front of me slams his seat back into “full recline” “”””””

    Ray when that happens just yell out in PAIN (wink wink) and guilt them into putting the seat back up. Or since you are tall, just keep coughing (wink wink) on top of their head, that will get them up fast.

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