UAL's United Air Cuts U.S. Flights

The airline will expand overseas capacity in a bid to boost revenue.
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Updated from 12:21 p.m. EDT

United Airlines' friendly skies are over international waters.

The carrier's parent company,

UAL

(UALAQ)

, announced Wednesday that it will expand lucrative overseas service while cutting its U.S. fleet. The carrier continues to pursue measures to boost revenue as it struggles with skyrocketing fuel costs and cutthroat domestic competition from low-cost carriers amid its efforts to emerge from Chapter 11 bankruptcy protection.

United will increase international capacity, measured in available seat miles, by 14%, while slashing U.S. capacity 12% on its flagship airline. The company will shift more domestic flights to regional carrier United Express and cut United Airlines' mainline fleet to 455 planes, 68 fewer than in August. By March 2005, United expects international routes to account for more than 40% of overall capacity.

"Fundamental changes in our industry, including ongoing high fuel costs, intense pricing pressure and continuing overcapacity, demand that we take aggressive steps now in implementing this plan to ensure that United remains competitive," said Glenn Tilton, United's chief executive, in a news release.

Tilton said United has "more work" to do to make its cost structure competitive, but asserted that the company's network, or hub-and-spoke, model, in which it feeds flights in and out of five large U.S. hubs, remains "viable today and in the future."

Observers said United is playing to its strengths by shifting focus to international routes, where it faces less severe pricing pressure.

"It's not a silver bullet, but it's a great first step that indicates they comprehend the future they're facing," said Stuart Klaskin, a partner at KKC Aviation Consulting.

Klaskin maintains that network carriers like United should abandon trying to compete on domestic routes where low-cost carriers have a competitive edge. Instead, they should maintain domestic flights into hubs where passengers can transfer to international flights.

Philip Baggaley, senior airline credit analyst at Standard & Poor's, noted other network carriers have been shifting capacity overseas, but said United's move is especially aggressive because it's coupled to a reduction in domestic capacity.

Still, the announcement failed to lift United stock, which is likely to be worthless if and when the carrier exits bankruptcy protection. Over-the-counter shares of the company were down 2 cents, or 1.9%, at $1.02.

The strategy moves follow United's release of September traffic figures Tuesday. The airline said it filled 77.5% of its flights during September, a record for the month. Traffic, a measure of demand tracked in revenue passenger miles, increased by 11.1% over September 2003, while capacity, a supply metric measured in available seat miles, rose 7.3%.

The ability to fill seats, however, doesn't necessarily translate into more revenue. Like UAL,

Continental Airlines

(CAL) - Get Report

, the only other major carrier to release monthly unit revenue figures, reported rising traffic and filled more of its planes in September but still saw revenue drop because of low prices.