Because of my early career experience in the aerospace industry (design team for McDonnell Douglas’ DC-10, then the engine for that jet at GE), I have always followed the airline industry closely. Capacity issues have haunted airlines for 6 decades now, going back all the way to 1942, when demand plummeted during that recession. Buying planes is a long term decision, but difficulties after 9-11 and during our current trying times created dramatic drops in demand for seats. This is a great classroom example when you are teaching Capacity in Supp.7.
How do airlines respond? As today’s New York Times reports, airlines trim capacity by grounding planes, reducing the number of flights between cities, and flying smaller planes. At the nation’s largest parking lot near the California Mojave Desert, some 200 aircraft of all sizes (from A320s to 747s) sit tip to wing tip. The dry air keeps the planes from rust and corrosion. Students will enjoy the photo in Supp. 7 showing this image.
The cost, up to $60,000 per month per plane. But the 7% cut in capacity last year helped raise ticket prices modestly. Airlines now fly at 80% of seat capacity, a full 10% higher than their traditional measure.
With the mergers of Delta with Northwest, United with Continental, Midwest with Frontier, and Southwest with AirTran, there is little growth in demand for more jets forecast in the US. Only 38 wide body planes are on order for delivery in this country by 2015. By contrast, 627 are going to be delivered to foreign carriers during that same 5 year period.
Discussion questions:
1. Why are airlines willing to spend enormous sums to park their planes in the desert?
2. Who can benefit from airline overcapacity?
3. The new Boeing 787 Dreamliner has run into such bad supply chain problems (Ch.11) that it is now 2 years late. How does this impact the airlines that ordered them?