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Capacity Cuts Could Deepen in 2009

Earlier this year, airlines cut capacity by between 10 and 15 percent to combat record high fuel prices and an uncertain economy. Now, six months later, fuel prices have gone down (for now) but the economy remains shaky, and as Bloomberg reports, airlines are considering another round of cuts in 2009. “The pullback at big carriers including [[Delta Air Lines | Delta Air Lines Inc.]] and [[American Airlines]] may reach 8 percent and include non-U.S. markets where they’ve been expanding in the absence of discount rivals.”

So for those of you keeping score, that’s an additional 8 percent of capacity on top of the 10 percent (or more) airlines have already cut this year. Capacity cuts are designed to protect revenue by keeping seat supply even with seat demand. It means that even as the economy tanks, ticket prices can remain more or less level.

But my question is, at what level? Since fuel prices began plummeting in September, airlines have been reluctant to make corresponding reductions to fares and fees, meaning that, with a few exceptions, passengers are still paying through the nose even though the airlines aren’t. Jim Corridore, a New York-based Standard & Poor’s equity analyst, tells Bloomberg, “The capacity cuts taken in 2008, combined with the drop in oil prices, should make for a nice year.”

Nice for the airlines, but not so nice for those of us who hope (or need) to travel in the coming year. Make no mistake, we need the airlines to be in good financial shape, so I’m glad they’re recovering from what has been a brutal year. But more capacity cuts, while certain to protect the airlines’ profit margins, would mean fewer seats and higher fares for passengers. In a slow economy, that’s not math I can believe in.

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