Airlines May Need More Capacity Cuts
CHARLOTTE, N.C. -- Suddenly the airline industry seems almost nimble, chopping capacity at a furious pace as it moves to try to offset record fuel costs.
Every major carrier has set plans to lower capacity, and leading the charge are
AirTran
(AAI)
and
Delta
(DAL) - Get Report
, both of which announced 10% cutbacks.
United, a unit of
UAL
(UAUA)
, plans a 9% capacity reduction, on top of a 5% decline last year.
In the case of AirTran, CEO Bob Fornaro said rapid fuel price escalation has left his company no other choice. "All carriers are going to react," he said during an earnings conference call. "We're going to change the revenue environment, pushing up average fares as redundant capacity leaves.
"Just raising prices without reductions in capacity is not going to raise the average fare," Fornaro said. "To support the price increases, capacity has to drop. You don't adapt to
an increase from $70 oil to $115 oil in three or four months. It takes a little time."
Oil has reached several all-time highs this year, and recently it has threatened to go above $120 a barrel.
However, capacity isn't the only thing shrinking -- so are job counts at some carriers. At Delta, which is withdrawing 45 aircraft from its fleet in order to achieve a 10% year-over-year decrease in domestic capacity, 2,000 jobs are also being eliminated. United is shedding 1,100 workers.
"We took a leadership position in aggressively taking out domestic capacity," Delta CEO Richard Anderson said Wednesday, on an earnings conference call. "We will continue to be aggressive."
Merger partner
Northwest
(NWA)
said it will reduce capacity by about 5% in September, leading to slightly lower capacity for the full year.
United CEO Glenn Tilton says his airline is not done with its capacity alterations. "We wouldn't want to leave you with the impression that this is a static plan that we've drawn a line under," he told analysts last week. "This is simply the plan at its current stage."
AirTran's Fornaro agreed. "I am absolutely convinced that two or three months from now,
assuming oil prices at $116, the carriers who announced 5% reductions last week will be announcing more."
Meanwhile,
JetBlue
(JBLU) - Get Report
said it will slow 2008 growth to between 3% and 5%, down from a planned 5% to 8%. The fourth quarter, with an expected 2.8% capacity decline, would be the first period of negative growth in JetBlue's history.
US Airways
plans mainline reductions of 2% to 4% in the second half of this year, although substantial capacity reductions following the 2005 merger with America West have left it close to the minimum of 322 jets specified in its pilot contract.
To be sure, most carriers continue to see strong demand in the coming months. Virtually none of the reductions take effect until the heavy summer travel season ends. That means airlines are looking at the slow travel period after Labor Day, assuming that oil prices will be where they are now -- or higher -- and concluding that the risk of doing nothing is higher than the risk of doing something.
If demand holds up, and if the industry, showing more capacity discipline than ever before, can adequately raise fares, then airline shares are at bargain prices. Last week, the Amex Airline Index traded at 20.12, its all-time low.
Among other carriers,
AMR's
(AMR)
American said it will cut consolidated capacity by 1.5% this year, including a 3.6% domestic mainline reduction.
Continental
(CAL) - Get Report
plans a 5% drop starting this fall, meaning 2009 capacity will be flat.
Southwest
(CAL) - Get Report
said it will grow capacity by just 2% to 3%, about half of what was planned.
United Senior Vice President John Tague said low-cost carriers should do more. "You still have significant low-cost carriers that have growth in their plans," he said.