The Impact of Airline Capacity Cuts

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To our valued Program Leaders, from Jake Mitchell, Vice President of Purchasing and Air Transportation:

U.S.-based airlines have recently announced plans to further restrict capacity in the face of continued elevated fuel prices and economic uncertainty.  These moves follow previous capacity cuts made earlier in 2011, creating even tighter supply as airlines anticipate the potential for less demand in late 2011 and into early 2012.

For example, Delta Air Lines recently announced it will reduce capacity 4-5% in Q4 2011, and 2-3% for 2012.  United Airlines, today the world’s largest airline following its merger with Continental Airlines, currently plans a “modest decrease” in domestic capacity in 2012 versus 2011, which is already slightly below 2010 capacity levels.  And Southwest Airlines, the largest carrier of domestic passengers, recently announced that it would keep capacity “flat or slightly down” in 2012.

From a historical perspective, domestic seat-capacity growth has lagged economic growth for the last two decades, and by the end of 2011 it will be at its lowest point relative to U.S. gross domestic production since 1979, according to data from the Air Transport Association.

You may be wondering, “Why is airline capacity cuts a topic for the Making Strides newsletter?”  Fair question.  Before telling you how this topic may impact you, it’s important to discuss how airlines reduce capacity and why they are doing so.

First, let’s define the term “capacity cuts.”  Simply put, when an airline either (a) cuts the number of daily flights on a route or (b) replaces a large plane with a smaller one, it reduces the number of available seats, and the airline thereby cuts its capacity.

Next, let’s address why airlines are reducing capacity.   The simple answer is “in order to maintain profitability.”  Given the continued economic challenges, airlines are expecting flat or moderately declining demand for air travel in 2012.  In this type of economic environment, the law of supply and demand dictates that in order to maintain prices you must reduce supply.  So airlines are planning to trim domestic capacity next year in an effort to maintain pricing power.  Additionally, by reducing capacity, airlines are able to boost load factors for the remaining fleet by shifting demand to available flight schedules, thereby reducing costs.

Now to the all important question – “How is this going to impact me?”  Below, we’ve outlined four ways capacity cuts may affect you.

  1. Many Flights Have Been Eliminated – We are seeing fewer flight options on almost every domestic routing in 2012 versus 2011.  This effect is particularly pronounced for some of our larger origin airports, particularly Los Angeles, San Francisco, Seattle, Chicago, and Denver.  And non-stop and red-eye service appears to be disproportionally affected.  WorldStrides will do our best to continue to offer the flights that our long-time customers have come to expect, but please know that our hands are tied in many situations.
  2. Smaller Planes – Many more routings are being served by smaller planes than has historically been the case.  In these circumstances, groups that have previously traveled together may need to be split.
  3. Packed Planes – When capacity is reduced at a faster rate than demand, load factors increase.  In simple terms, this means that more seats on each flight are occupied.  This phenomenon also contributes to the difficulty in accommodating larger groups.
  4. Schedule Changes – When airlines reduce capacity, they make changes to their flying schedule.  Schedule changes are particularly troublesome when they are made close to the departure date, and unfortunately, many times there is no suitable solution to dealing with them.

In summary, we expect airline capacity cuts to have a significant impact on available flight options in Spring 2012.  In fact, we are already seeing this in our inventory systems.  Undoubtedly, these cuts will negatively impact many of our customers.  We recognize the inconvenience and challenges that this presents for our Program Leaders and students, and we are sorry.  Rest assured that WorldStrides will continue to do everything we can to provide exceptional service in all areas.

Jake Mitchell
Vice President, Purchasing and Air Transportation

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