Fuel is expensive, so airlines are cutting capacity, right?

Not really - at least, not yet.

The conversations we’ve had over the past few weeks have been focused on how fuel prices are going to force the airlines to cut capacity. It makes sense. With fuel almost twice as expensive as it was two months ago, once-profitable routes suddenly become unprofitable. Either they go, or the airlines lose more money.

The airlines are sticking with option B.

To be sure, there are some airlines reducing short-term capacity. Of course, the ME3 carriers were forced to make major cuts in April, and they did. In fact, April capacity was the first global year-over-year reduction in capacity we’ve seen since early 2020.

As covered in the Cranky Network Weekly over the past two weeks, Mexico is seeing some near-term cuts. But, they’re almost entirely limited to April and early May.

And speaking of May, here we go. Right back to a 3% increase in capacity over 2025.

What does this mean for the global airline industry? It could mean May cuts are still on the way, but that becomes problematic. Making schedule changes so close to departure means you have quite a few people who booked those flights that you now need to reaccommodate. It causes other issues, as well. Passengers reading their “Your flight is confirmed” email when booked a month prior, now get a different email: “JK, we canceled it because not enough people paid a high enough fare. Better luck next time.”

Not exactly the brand confidence builder.

More likely, airlines are waiting to see what is going to happen with fuel. Memories of the last geopolitically driven fuel spike — that one driven by Russia’s quick “special military operation” in Ukraine that just entered its fifth year.

But airlines learned the mistake was in taking their foot off the gas at a time when the global market was short seats. Power through, protect share, and hold your nose. It will all be over shortly.

And from a fuel price perspective, it was over shortly. After spiking to $4.40 a gallon in May 2022, a gallon of Gulf Coast Jet A was consistently below $2.50 by the end of the year.

But the market is materially different today. Sure, fuel prices may stay higher longer, but there is no reason to believe they won’t be back below $2.50 by the end of the year, like last time. What is different this time isn’t fuel, it’s capacity.

If you’ll remember, 2023 was the year the world finally admitted it was short of aircraft. The U.S. had all the aircraft deliveries, but was short the pilots to fly them. Fares increased like crazy because nobody could add the flights.

That’s not exactly the case today. We are hearing of serious yield pressure from almost all regions. While the U.S. network carriers laud their ability to cater to the premium passenger, extracting loyalty revenues from those sweet, sweet credit card interchange fees, everywhere else appears to be hitting a ceiling.

And this sets up the concern over the next 12 months. Airlines are quick to announce they’re engaging in the capacity discipline to limit costs, but then aren’t actually cutting capacity in a meaningful way. It’s not the fuel prices that have us concerned; it’s the market equilibrium the airlines seem primed to shoot right through. (In fairness, did anyone, anywhere, really believe the airlines wouldn’t overdo it this time?)

And so, we near the peak summer season with more seats than ever being deployed into a market showing serious signs of slowing — the same market, I might add, that is dealing with high oil prices. That gives us about five months until the peak summer season becomes the fall not-so-peak season. Despite what fuel prices may be at that point, our attention is toward the slow season and the potential for a rude awakening come September.

Can low-cost airlines still grow with 240-seat aircraft? Not indefinitely. Now on deck - the small narrowbody.

Our latest analysis, published alongside Falko, looks at the economics of the low-cost business model. Once focused on low seat costs and consistent growth, the segment is showing signs that aircraft have grown too large.

This analysis examines why this cycle has resulted in the inevitable and why some of the largest low-cost airlines are struggling to achieve profitability and growth simultaneously. If you question the idea that a low-cost airline must use the largest aircraft available, you quickly settle on the conclusion that tomorrow's low-cost growth can be found not in the large, but in the small.

Using the U.S. as a proxy, 53 markets remain with more demand than nonstop supply, where the large narrowbody is the most profitable option. Compare this with 264 profitable markets with the small narrowbody.

That's five times the growth potential, unlocked by a shift in thinking that bigger is always better.

If you somehow missed this analysis, which was published Tuesday, you can still read it in its original glory, here: The Seat Cost vs Trip Cost Paradox

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