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Airline Industry

US carriers might be forced to cut seat capacity by 5%

Jun 11, 2009

Delta Air Lines Inc., American Airlines and other U.S. carriers may need to trim as much as 5 percent more seating capacity after the summer travel season to increase fares.

About two-thirds of any reductions probably will come on overseas routes where planes are emptier, said Kevin Crissey, an analyst at UBS Securities LLC. Carriers may announce capacity cuts as soon as tomorrow at a conference in New York hosted by Bank of America Corp.’s Merrill Lynch unit, analysts said.

A 12-month slide in traffic among the biggest U.S. carriers means there are still too many seats to support higher prices. A new round of cuts would build on the elimination of 10 percent of U.S. airlines’ capacity since the start of 2008, including the parking of 500 jets.

“Something in the 3 percent to 5 percent range is probably what we’ll see, and the more the better,” said Crissey, who is based in New York and recommends buying Delta, the world’s biggest airline.

Global airline revenue may fall 15 percent to $448 billion this year amid the “most difficult situation that the industry has faced,” the Geneva-based International Air Transport Association said on June 8. North American carriers will probably lose about $1 billion, the trade group said.

Carriers will trim at least 4 percent more capacity as ticket sales languish, estimates Helane Becker, an analyst at Jesup & Lamont Securities Corp. in New York. She recommends buying Delta, American parent AMR Corp., United Airlines parent UAL Corp. and Continental Airlines Inc.

‘Anything Helps’

“I wouldn’t expect to see any bottoming or pickup until the first quarter of 2010 at the earliest,” Becker said. “Most companies have cut travel budgets and they’re not reinstating any money until they see signs of improvement.”

The U.S. jobless rate is at 9.4 percent as of May, the highest since 1983. The economy probably shrank 2 percent for the current quarter and will expand by 0.5 percent in the third quarter, according to the median estimate of 63 economists surveyed by Bloomberg.

The Bloomberg U.S. Airlines Index of 13 carriers fell 41 percent this year through yesterday.

For three of the past four months, traffic slid 10 percent or more as travel cutbacks deepened.

“I’d like to see at least another 5 percent of capacity come out,” said Hunter Keay, an analyst at Stifel Nicolaus & Co. in Baltimore. “Anything helps.”

Delta may be in the “best position to cut more” because it has some redundant routes and extra planes from its purchase of Northwest Airlines last year, Keay said. He recommends buying Delta and holding Continental, UAL, AMR and Dallas-based Southwest Airlines Co.

Parking Jets

Delta said in April it would reduce full-year international capacity by as much as 7 percent, while domestic flying will decline 8 to 10 percent. The Atlanta-based carrier hasn’t provided updated guidance since April, said Betsy Talton, a spokeswoman.

American Airlines may be able to trim some additional flights to London Heathrow, and Chicago-based United may park another couple of Boeing Co. 747 jets as part of its plan to remove 100 jets from service, Keay said.

Jean Medina, a UAL spokeswoman, declined to comment. American Airlines Chief Executive Officer Gerard Arpey said June 7 in Kuala Lumpur that the Fort Worth, Texas-based carrier is monitoring demand closely and hasn’t decided on further cuts.

Continental may feel pressure to reduce some international flying because its cuts have lagged behind bigger carriers, said Michael Derchin, an analyst at FTN Equity Capital Markets Corp. in New York. Total capacity by U.S. carriers needs to decline by about 7 percent this year, he estimates.

‘Difficult Decisions’

“We have always been responsive to demand in the marketplace,” said Julie King, a spokeswoman for Continental. “We are closely monitoring the market and will continue to adjust capacity as needed.”

Continental said in April that its full-year international capacity will decline as much as 3 percent, while domestic capacity on the Houston-based carrier’s main jets will drop as much as 7 percent.

May marked the fifth straight monthly decrease in revenue from each seat flown a mile at Continental and Tempe, Arizona- based US Airways Group Inc., the carriers that most consistently report the number on a monthly basis. The drop partly reflects a decline in yield, or average fare per mile, as carriers compete for fewer travelers.

US Airways has “no further plans to reduce capacity today,” spokesman Morgan Durrant said yesterday.

Delta, American, United and Continental may drop flights to certain overseas cities on slower days of the week such as Tuesday or Wednesday to get additional savings, said Robert Mann, who runs airline consulting firm R.W. Mann & Co. in Port Washington, New York.

“The problem with doing that is you give the business travelers one less reason to choose you,” Mann said. “We’re in a time when difficult decisions like these need to be made.”

US carriers might be forced to cut seat capacity by 5%
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