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Airline Industry

The ones with the best international routes will recover the fastest

Jun 18, 2009

Battered U.S. airlines are trimming first- and business-class seating in favor of coach on international flights as they wait for signs of life in high-end travel that could presage a broader recovery.

So far, these signs are scarce, but if a global economic recovery takes hold, airlines with the best international routes will recover the fastest.

Until that happens, however, U.S.-based global carriers -- especially those with a large transpacific presence -- will suffer more than their rivals.

"That's going to be the trend to watch through the summer to see if we get any kind of moderation in the year-over-year declines in passenger unit revenue on the international side," said Bill Warlick, an airline analyst at Fitch Ratings.

"That might be a leading indicator of some broader revenue recovery in the industry."

In recent years, airlines such as UAL Corp's United Airlines and Northwest Airlines, which was bought last year by Delta Air Lines Inc, beefed up first- and business-class cabins for long flights hoping to attract well- heeled travelers.

They also tried to move capacity from competitive domestic routes to less crowded and more profitable international flights and competed hard for rights to fly to China.

"They would argue that, long-term, it's going to drive some kind of unit revenue premium to the industry," Warlick said. "But at this point, it's hard to say that there's any significant return on that investment."

Business travel has been in rapid decline since the economic recession took hold last year and savings conscious companies cut back on travel. Some are buying cheaper seats on long-haul flights, leaving airlines scrambling to fill premium cabins.

In May, United, which has a huge Asian presence, saw its international traffic fall 15 percent, outpacing an 8.7 percent cut in capacity on those routes. United's traffic on Pacific routes declined 21.4 percent even as it trimmed 12.7 percent from its capacity.

Delta, which has a hub in Tokyo, said international traffic fell 14.6 percent in May, while traffic on its Pacific routes declined 31.6 percent on a 20.5 percent decline in capacity.

American Airlines, a unit of AMR Corp, reported an 8.9 percent drop in international traffic in May and a 6.7 percent decline in Pacific traffic.


Some of the decline may have been a result of concerns about the H1N1 flu virus in addition to the longer-term trend of falling travel demand.

"The single weakest area that they're facing right now is premium international travel and it's their most profitable segment," said Jim Corridore, an airline analyst at Standard & Poor's. "Obviously, they would love to see some signs of improvement on that front."

Seeking to accommodate the shift in demand from first- and business-class seats, United is moving some of those seats to cheaper classes.

"We're increasing slightly the total count because we're putting some in coach," Greg Taylor, UAL's senior vice president of corporate planning and strategy, said at an investor conference last week.

"Pulling 20 percent of the business-class seats out in the current environment is a good place to be."

Delta said last week it would cut international capacity 15 percent starting in September. AMR also announced deepening capacity cuts and other airlines are expected to follow.

"We are facing a significant reduction in corporate travel which, combined with the aggressive sales activity that we've experienced, has led to much weaker booking class and cabin mix on board our aircraft," Delta President Ed Bastian said at an investor conference last week.

"We feel like we're stabilizing, but that doesn't imply recovery quite yet."

The ones with the best international routes will recover the fastest
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