Traffic Jam Over the Atlantic

U.S. carriers are expanding their routes to Europe, hoping to build on last year's successes.
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When country singer Alan Jackson recorded

Too Much of a Good Thing Is a Good Thing

, the airline industry might have been listening a little too closely.

This summer, U.S. carriers are pouring capacity into the trans-Atlantic market, hoping to continue last year's successes.

Last week,

US Airways

(LCC)

became the latest to announce trans-Atlantic growth, saying it will fly to Lisbon, Milan and Stockholm from Philadelphia. Days earlier,

Delta Air Lines

(DALRQ)

, seeking to become the world's largest trans-Atlantic carrier, said it plans service from Atlanta to Dakar and Johannesburg.

In the first three quarters of 2005, the six major U.S. carriers increased their capacity across the Atlantic by 7.9%, resulting in a 15.5% revenue increase to $9.6 billion, according to Eclat Consulting of Reston, Va.

Continental Airlines

(CAL) - Get Report

boosted trans-Atlantic capacity by 16.8%, followed by

Northwest Airlines

(NWACQ)

with a 12.4% increase.

Continental showed the highest revenue increase, 26.6%, while Northwest reported a 17.2% jump.

AMR's

(AMR)

American Airlines saw revenue rise 16.1%.

"The legacy carriers put more capacity in international markets, driven by the revenue performance, which was quite good," said Gary Harig, Eclat's senior vice president. "Clearly, the domestic environment was more difficult. But they have to be cautious if it continues to increase."

Faring Well

Probably it's too early to say how this year's capacity increases will affect pricing. Last year's rise didn't hurt yields, said Jon Ash, president of Washington-based InterVistas-ga2. This year, Ash estimates, capacity could rise another 5% to 7%.

"Whether there's enough traffic remains to be seen," he said. "The seats will get filled, but perhaps at lower fares."

British Airways

(BAB) - Get Report

, the biggest trans-Atlantic carrier at the moment, with 100 daily flights, is watching the capacity increases.

"The market in terms of volume remains strong, and yield remains under pressure," said Robin Hayes, British Airways' executive vice president for North America. "But we had a strong summer last year, and I don't expect a decline this year."

Hayes said the number of U.S. passport holders has been gradually increasing to more than 20%, which means that more people are able to travel abroad spontaneously.

He also reiterated British Airways' historic belief in the superiority of its trans-Atlantic product, which includes a unique four-class service: first, business, economy and premium economy, which has bigger seats than normal economy. This summer, the airline that originated flat beds in airplanes plans to unveil "even better beds," Hayes said.

British Airways expects to increase trans-Atlantic capacity by 3.5% this summer, with more frequent flights from London to Seattle and Vancouver and adding Boeing 747s to Washington, D.C. But while British Airways is expanding trans-Atlantic service, it's worth noting that the airline's real growth is in the London-India market, where it plans a capacity increase this year of more than 40%.

Still, the trans-Atlantic route remains a relatively safe haven for U.S. majors, which don't have to worry about incursions by low-fare carriers. Hayes said that low-cost carriers simply don't have airplanes that are large enough to carry enough fuel and passengers to make the trips worthwhile.

Go Coach

Mike Boyd, an airline analyst in Golden, Colo., quoted former Continental CEO Gordon Bethune as saying there's "plenty of low-cost capacity across the Atlantic. It's called 'coach.'"

Boyd said it makes sense for carriers to pick new European markets such as Lisbon and serve them from strong hubs. "With a good hub, you can make these routes work," he said. "The passenger might be going from Lisbon to Philadelphia to Los Angeles, and that's a passenger that

Southwest

(LUV) - Get Report

and the low-cost carriers can't touch."

In a mammoth expansion, Delta said it will open 11 trans-Atlantic routes between March 27 and June 6, some of the 50 new international destinations it has started or announced in the past year. The trans-Atlantic routes include Tel Aviv, Dusseldorf, Copenhagen, Edinburgh, Nice, Athens, Venice from Atlanta, and Budapest, Dublin/Shannon, Manchester and Kiev from John F. Kennedy in New York.

Delta's aggressive expansion hasn't been universally applauded, however. On a conference call last month, Continental Airlines President Jeff Smisek noted that Delta is growing rapidly in international markets, and added that "they're taking more business risks than I would if I had their execution capabilities, but that's their decision. That said, I think you'll see some more competition in the international markets."

Other carriers have shown more selectivity in their trans-Atlantic routes. American, for instance, said last month that it would cancel plans to add flights between Kennedy and Newcastle, England, citing concerns including fuel costs and excess capacity. "It's probably not the right time to start it," CEO Gerard Arpey told analysts. American recently added service from Chicago to Delhi, India, and next year it will launch service from Chicago to Shanghai.

Meanwhile,

UAL

(UAUA)

subsidiary United Airlines has reduced Atlantic capacity by 6.2% during the past year. The carrier eliminated flights from San Francisco to Paris and Amsterdam to Chicago, and shifted larger airplanes to Asian routes, which showed a 1.5% capacity gain during the year. Now, United uses Boeing 767s and 777s on its European routes, with its larger 747s flying almost exclusively in Asia.

Consultant Dan Kasper of LECG in Cambridge, Mass., said he's optimistic that trans-Atlantic yields won't suffer much from this year's growth.

"Despite the concern that the capacity increase would put downward pressure on prices, that didn't seem to happen last year," he said. "This year, the fundamentals look pretty good for solid economic growth on both sides of the pond, and that would seem to portend well for travel."