US domestic demand is coming back, with most carriers forecasting flat to positive unit revenues this quarter after nearly two years in the wilderness.

The shift follows a year of capacity tightening and an improving US economy in 2016. The latter is expected to continue in 2017, with the new Trump administration promising an “America first” economic programme designed to spur growth and create jobs.

Analysts agree that continued capacity discipline, on top of an improving domestic economy, could benefit airline financials this year.

Boon or not, capacity discipline may not be buzz words in network planning departments. United Airlines executives have made it clear that they plan to expand domestically by restructuring their schedule to better utilise existing aircraft. The aim is to recapture share that the Chicago-based Star Alliance carrier has lost to competitors in recent years.

United plans to increase domestic capacity by between 1.5% and 2.5% this year, up to a percentage point more than in 2016, on 1-2% system growth.

Capacity concerns

However, the Chicago-based carrier’s plans to grow domestically – which it has been following since November – do not appear to concern analysts. What does are comments by other airlines suggesting that they could add domestic growth back to their capacity plans in 2017 as international yields lag.

“As we look at the balance of international versus domestic it wouldn’t shock me if we slightly toned down international [capacity growth] and add a little bit to domestic this year,” said Andrew Nocella, chief marketing officer at American Airlines, in January.

The Fort Worth-based Oneworld Alliance carrier forecasts flat domestic capacity and 4% international growth, with the latter driven by markets added in 2016, on system growth of roughly 1% for 2017.

“The messaging to investors is pretty poor,” said STIFEL analysts in a January report. “Domestic RASM [revenue per available seat mile] has finally turned positive – now let's start adding capacity.”

STIFEL and other banks estimate roughly 3.5% industry capacity growth in 2017, based on the guidance airlines have provided to date.

US capacity 2017

American was the first major US carrier to return to positive total unit revenue (TRASM) growth, reporting a 1.3% increase in the fourth quarter of 2016. It expects the metric to rise by 2.5-4.5% in the first quarter.

Other US carriers, including United, expect to return to flat to positive unit revenues in the first quarter.

The domestic demand environment this quarter has been described as “stable” and “solid” by American and Delta Air Lines, respectively, to “meaningfully better” and “very strong” by United and Southwest Airlines, respectively.

“The outperforming domestic space provides incentive to shift growth from International at a minimum, if not exceed the system outlook,” said Rajeev Lalwani, an analyst at Morgan Stanley, in a report earlier in February.

No returns

Analysts are optimistic that airlines will not repeat 2015, despite the concerns raised by management comments. In 2015, carriers failed to moderate capacity growth despite a weakening yield environment, which resulted in unit revenue declines of up to 5.4% at the four largest US carriers.

“We'd be surprised if airlines make the same mistake again,” says STIFEL. “Barring any significant improvement in underlying economic trends, we don't expect American to materially change its capacity plans.”

In response to Wall Street concerns, JetBlue Airways shaved a percentage point off its 2017 capacity growth plans earlier this month. It now expects available seat miles (ASMs) to rise by 5.5-7.5% this year.

Delta and Southwest both plan slower domestic growth this year than in 2016. The former forecasts roughly 2% domestic capacity growth and the latter roughly 2.5% growth, down 2.5 points and more than three points, respectively.

“We [are] not changing our fleet plan. We've already committed to growing the system 3.5%, nothing has changed in our network plans for 2017 from October,” said Gary Kelly, chief executive of Southwest, in January.

Source: Cirium Dashboard