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Airline Industry

A 1-2-3 punch for airline passengers?

Jun 11, 2009

Corporate travel and ticket sales of premium seats are down. Overall demand is weak. And fuel prices are rising — again. The one-two-three punch could be bad news for consumers this fall, as airlines face pressure to raise fares or cut more capacity to cover their costs.

Executives at several airlines, including Delta, Southwest, US Airways, Continental and American, gave bleak outlooks Thursday during an investor conference in New York, and there was little talk from anyone of a near-term rebound. AirTran offered a bright spot amid the industry woes, as its chief financial officer said the discount carrier expects to have "one of the best years in the company's history."

The rise in unemployment and hits Americans have taken to the value of their homes, coupled with the meltdown in the financial markets, has caused a significant slowdown in air travel. Airlines also have lost business from the swine flu, which has caused some people to cancel travel plans to Mexico.

Atlanta-based Delta Air Lines Inc. projects it will take a $125 million to $150 million revenue hit in the second quarter because of the impact on air travel from the swine flu virus. The quarter ends June 30. The swine flu scare also has hurt Delta sales to customers in Asia, who may be worried about travel because of the SARS outbreak in 2003.

The overall drop in demand has coincided with a recent increase in fuel prices, which means lower sales — one executive said industry passenger revenues have declined nearly 20 percent in the first four months of the year — are meeting higher costs.

If fuel prices continue to climb into the fall, airlines will be under pressure to raise prices or cut more capacity to cover their costs, Delta President Ed Bastian said. Delta has made a decision not to "put seats out into the marketplace if we can't recover the cost of that seat," he said.

Experts have said they don't expect fare sales to end anytime soon, given weak demand for air travel.

Fewer seats in the air translates into fewer options for travelers, in the form of routes not being served anymore by an airline or an airline flying smaller planes to a destination or cutting the number of flights to a destination. Routes across the Atlantic are expected to be significantly impacted.

Delta said Thursday it will shave additional seats from the air and warned that more than $6 billion in benefits it expected from lower fuel prices, its merger with Northwest Airlines and previous capacity reductions will be overtaken by declining revenues. American Airlines, a unit of Fort Worth, Texas-based AMR Corp., also announced new capacity cuts.

"I think it is crazy to assume and bet on things improving anytime soon," Southwest Airlines Co. Chief Executive Gary Kelly said at the Bank of America-Merrill Lynch Global Transportation Conference.

Delta said it will reduce system capacity by 10 percent this year compared to 2008. That is up from Delta's previous plan to cut system capacity by 6 percent to 8 percent.

Delta also will reduce international capacity 15 percent, up from a previous plan to cut it by 10 percent.

Delta said capacity reductions will begin in September.

The additional capacity reductions mean staffing levels will be reassessed, Delta said.

Delta said staff levels will be down more than 8,000 jobs by the end of 2009 compared to spring 2008. A spokeswoman said the figure reflects job reductions already accounted for through voluntary programs, as well as a mixture of open jobs not filled and administrative job reductions associated with Delta's integration with Northwest.

American said advance bookings through late summer are down from last year, and it will cut more flights. Chief Executive Gerard Arpey said American would cut its full-year 2009 capacity about 7.5 percent. That's up from an earlier goal of cutting 6.5 percent, and will require about a 2 percentage point reduction in flights in the second half of the year.

The reductions will take effect in late August.

Arpey said advance bookings through August were down about 2 percentage points from last year.

"That's terribly alarming to me," he said.

Southwest's Kelly said it's a very difficult time in the airline industry, and earnings are going to be very stressed until the economy changes.

Business travel remains weak, which is cutting into the number of last-minute, full-fare tickets and traffic on shorter routes, Kelly said.

Dallas-based Southwest is responding by cutting unprofitable flights, adding fees for unaccompanied minors and pets, and offering incentives for employees to leave the airline.

Southwest has lost money the past three quarters.

Houston-based Continental Airlines Inc. is pressing its corporate customers to step up their travel, Chief Executive Larry Kellner said.

"We're working our business (traveler) side very hard because clearly this is where we could also see a recovery much more quicker if we could get the business traffic back on the airplanes," he said.

Tempe, Ariz.-based US Airways Group Inc. said the dropoff in passenger revenue during the current recession is even worse than the decline that happened after Sept. 11. Its president, Scott Kirby, said the outlook for this year is highly uncertain. He said US Airways brought back a domestic fuel surcharge on Wednesday night, and raised its fuel surcharge for flights across the Atlantic.

It wasn't all bad news for the airlines Thursday.

AirTran CFO Arne Haak said AirTran expects to turn a profit for the full year. He didn't offer a specific projection. He reiterated the company's plans to cut capacity this year by 4 percent, a smaller cut than at other airlines. AirTran Airways, a unit of Orlando, Fla.-based AirTran Holdings Inc., has benefited from its very low cost structure. Haak said AirTran's costs are nearly half of what Delta's are on a stagelength-adjusted basis.

Comparisons between carriers are significantly affected by the distance flown. Adjusting for stage length is designed to compare results as if two carriers fly the same flights.

A 1-2-3 punch for airline passengers?
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Source: AP

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