Will Wall Street’s ‘Capacity Discipline’ Enforcers Jump Back In As Airlines Report Earnings?

Capacity discipline is back: it reappeared on the Delta Air Lines earnings call last week.

“Throughout the pandemic, we have been the most disciplined in the return of supply and have probably have a better match to demand than anyone else,” Delta Ed Bastian said Thursday, responding to an analyst question. “And it’s been interesting to watch because a lot of airlines have taken different approaches over the course of the last two years.”

Bastian did not name the airlines that have taken different approaches, and a Delta spokesman declined to identify them. But last week, both Alaska and JetBlue had to cut back their schedules and acknowledge that they had too few crews to fly them. As Dennis Tajer, spokesman for the Allied Pilots Association, which represents American pilots, has said: (Airlines) are just collecting revenue, selling tickets for flights they can’t staff, and hoping that things go well.”

A key number in Delta’s earnings report was 84%, the carrier’s projection for the percentage of 2019 June second capacity that it will fly in the current quarter. Because Delta was the first carrier to report, all who follow will have their capacity number compared to Delta’s. American, the largest airline, has not projected second quarter capacity, but in the first quarter, American flew 89% of its same quarter 2019 capacity, while Delta flew 83%.

During the Delta call, President Glen Hauenstein declared, “I think we’ve done a very good job as a company being nimble in our offering throughout the pandemic and really been closest to actual demand if you look back at what demand was.”

The response from Deutsche Bank analyst Mike Linenberg was: “Great. We and investors love the discipline.”

It was a reminder that Wall Street loves capacity discipline, on the theory that lower supply means higher prices. Particularly in the mid-2010s, capacity gains were met with analyst disdain. For instance, a May 2015 headline in TheStreet proclaimed, “Southwest Airlines’ Capacity Gains Are Panned by Wall Street Analysts.” The story said, “Wall Street analysts generally resist capacity growth, believing it can lead to lower fares and lower revenue per available seat mile, not just for the expanding airline but for competitors as well. “

At the time, the carrier was growing at Love Field following the 2014 expiration of the Wright Amendment, which strictly limited non-stop flying, and at Houston Hobby, where an international terminal was scheduled to open. “We believe we have pent-up demand out of Love Field,” said Southwest CFO Tammy Romo.

The story noted that analyst Wolfe Research analyst Hunter Keay, now CFO for fast-growing Avelo airlines, grilled Romo on the growth plan.

Another airline in the crosshairs in the mid-2010s was Delta after Hauenstein decided to build a trans-Pacific hub in Seattle. In late 2013, Delta operated 35 departures at Seattle-Tacoma International Airport. In 2014, it named Seattle a hub and began to grow rapidly there, reaching 174-peak-day departures in the summer of 2019.

In October 2014, a headline in TheStreet said: “Delta to Wall Street: Don’t Tell Us How to Run Our Airline”

The story said, “Fresh from hounding JetBlue CEO Dave Barger out of a job because the carrier provides too many luxuries to its coach-fare passengers, some Wall Street analysts have turned their sights on Delta.

“Delta’s transgression, they say, is adding too much capacity at a time when ‘capacity discipline,’ strongly encouraged by Wall Street, has been a key factor in the airline industry’s transformation into a more profitable, less cyclical, investment-worthy business.

On the call, JP Morgan analyst Jamie Baker started a question by asking, “I am curious about how you model for new routes and whether that has evolved at all over time, and in particular whether you consider earnings multiple destruction.”

The question led an apparently irritated CEO Richard Anderson to declare: “We will not discuss pricing and we will not discuss capacity among competitors on these calls today or in the future, because it is not appropriate.

“And it is not appropriate for the analyst community to be engaging in what forward capacity and pricing decisions are at Delta,” Anderson added.

This time is different, of course. Amidst a sudden post-pandemic recovery, capacity discipline has become a way to protect airlines from themselves and from potentially unfortunate summer scheduling events. It seems to be an area where, for the moment, Delta, Wall Street and the airline pilot unions all share a common interest.