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," he said during a Raymond James conference. Bastian said 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 at $105 on the New York Mercantile Exchange.
The article originally was published in Business Travel News.