American Airlines,
United-Continental Airlines and Frontier Airlines this month revised downward their
2011 capacity growth plans as crude oil traded above $100 per barrel. The
carriers follow Delta Air Lines, which in early February was the first major U.S.
airline to curtail 2011 growth plans. Analysts expect further cuts unless fuel
costs abate.
Meanwhile, the recent
run-up in crude oil prices has helped airlines make the case for higher fares.
J.P. Morgan analyst Jamie Baker in a research note this week, for example,
wrote that Southwest Airlines this past weekend "pushed the entirety of
its domestic fare structure higher by $5 one-way, marking its fifth broad-based
increase since early December."
Citing "the recent
increase in fuel prices," United Continental Holdings this week announced
plans to reduce frequencies, postpone flight launches "to certain
markets" and cut unprofitable flying, culminating in year-over-year capacity
declines of 1 percent for its summer schedule and 4 percent for its fall
schedule. The company expects full-year 2011 capacity to be flat, compared with
previously expected growth of up to 2 percent, with domestic capacity down as
much as 2.5 percent this year and international capacity up by no more than 3.5
percent.
American Airlines indicated
that consolidated capacity would be "1 percent lower than the previously
communicated 2011 levels," according to a presentation last week by vice
president of corporate development and treasurer Beverly Goulet at a J.P.
Morgan investment conference. American previously had anticipated consolidated
capacity this year would be up 4 percent.
After previously
planning growth of 1.5 percent to 2.5 percent for the second quarter, Frontier
this week announced second-quarter capacity would be flat year over year "due
to the uncertainty of future oil prices."
Recent capacity moves
should help airlines maintain pricing power and support "efforts to
maximize profitability amid higher fuel prices," according to a research
note issued this week by Morgan Stanley aviation analyst William Greene.
"Managements are
responding to higher fuel by pulling the capacity lever," wrote UBS
aviation analyst Kevin Crissey this week in a research note. "We expect
more cuts to come should fuel prices remain high."
Delta was first to pull
the lever. President Ed Bastian in February claimed the carrier's quarterly
capacity already had been reduced by 2 percentage points, though he attributed
some supply reductions to winter weather complications.
"My expectation is,
you will see us take more capacity out on a full-year basis," Bastian said
during a Raymond James conference, adding that he expected full-year capacity
to increase at the low end of Delta's 1 percent to 3 percent growth plan.
Though US Airways has
yet to join its largest competitors in adjusting capacity, CFO Derek Kerr
during the carrier's fourth-quarter earnings call in late January noted that
"as we move into the fall schedule, we would much more likely reduce
capacity." US Airways expects 2011 mainline capacity to grow 2 percent from
last year.
West Texas Intermediate
crude oil has hovered above $100 a barrel this month and today traded above
$105 on the New York Mercantile Exchange.