U.S. Airlines Cut Capacity to Battle Fuel Costs


Major U.S. airlines announced further 2011 capacity reductions on Tuesday to cope with increasing fuel prices, with Delta Air Lines (NYSE:DAL) also blaming the earthquake in Japan for a hit to earnings in the current quarter.

US Airways Group Inc (NYSE:LCC) said it would reduce flying this year, joining United Continental Holdings (NYSE:UAL) and other carriers that have already outlined capacity curbs.

Delta currently estimates its fuel bill will rise 35% this year, or about $3 billion. That would result in a hit to first-quarter earnings. Delta President Edward Bastian said the airline expects an operating margin of negative 2% to 3% for the period, compared with a prior forecast of a positive 1% to 3% operating margin.

Carriers have steadily boosted fares this year as $100-a-barrel oil threatens to derail the industry's recovery from the 2008 and 2009 economic downturn. While higher travel demand is boosting airlines' unit revenue, costs are also rising.

Oil prices moved up on Tuesday after more Mideast unrest. NYMEX crude, which is directly tied to jet fuel prices, was up 1.2% at $103.55 in afternoon trading.

"While capacity restraint should help, the key to overcoming higher fuel costs is to increase revenue," said Beverly Goulet, vice president of corporate development for American Airlines parent AMR Corp (NYSE:AMR).

US Airways said its fourth-quarter system capacity would be down as much as 2% from previously expected levels, and Delta said it would scale back capacity both internationally and in the United States in the second half.

Domestic carrier Southwest Airlines Co (NYSE:LUV) said its capacity plans for this year have not changed, but Chief Executive Gary Kelly said higher oil had forced the low-cost airline to raise ticket prices.


The negative effect on revenue from the March 11 Japan earthquake will also pressure results in the short term, airlines said.

AMR cited a "modest decline" in revenue from Japan.

Delta, which operates more flights to Japan than any other U.S. carrier and generates a bit over $2 billion a year from that market, estimated the business impact of the earthquake, tsunami and their aftermath could range from $250 million to $400 million. It is cutting capacity to Japan by 15% to 20% through May.

"Over the next two to three months we will undoubtedly see some fairly significant drop-off in demand and drop-off in bookings" tied to Japan, Bastian said.

U.S. airline shares were mostly lower in afternoon trading. The Arca Airline index .XAL was down 1.1%. AMR fell 3.7% to $6.53, Delta was down 1.9% at $9.98 and industry leader United Continental Holdings Inc (NYSAE:UAL) was off 2% at $23.50.