US airlines say demand up, see more capacity cuts

ATLANTA Fri May 20, 2011 6:30am EDT

A Delta plane sits on a runway prior to takeoff at John F Kennedy International Airport in New York December 25, 2009. REUTERS/Lucas Jackson

A Delta plane sits on a runway prior to takeoff at John F Kennedy International Airport in New York December 25, 2009.

Credit: Reuters/Lucas Jackson

ATLANTA (Reuters) - U.S. airlines said on Thursday that bookings were strong heading into summer, but higher fuel prices were pressuring profits and Delta Air Lines (DAL.N) said it would cut capacity further in response.

Delta, the second-biggest U.S. carrier behind United Continental Holdings (UAL.N), also said it would reduce maintenance and other non-fuel-related costs.

Demand for air travel is picking up after years of weakness, but the picture is clouded by an uncertain U.S. economic recovery. Weak data on U.S. home sales and factory activity on Thursday showed an economy stuck in slow-growth mode.

Oil prices that have risen 40 percent from a year ago are raising airlines' costs and cutting into profits. In response, the carriers are steadily raising fares, dumping less fuel-efficient planes and looking for ways to save money.

Delta said 55,000 of its employees were eligible for a voluntary exit program it announced this month in a bid to cut costs.

Shares of major U.S. airlines rose as oil prices retreated after U.S. jobless claims raised concern about the labour market. The Arca Airline index .XAL was up 1.4 percent.

"We must anticipate these rapidly rising fuel prices are going to stay with us," Delta President Edward Bastian told a Bank of America Merrill Lynch conference on Thursday.

While a recent sell-off in oil had brought some relief, airlines cautioned that oil prices were still very high.

"We need to make sure that we continue to work diligently to get paid for the higher cost of fuel and the product," Bastian said.

IMPROVING DEMAND NOTED

Delta's spring and summer bookings looked "quite strong" as demand improves from earlier this year, Bastian said. Japan, which accounts for 8 percent of Delta's overall revenue, was continuing to recover after the March earthquake and tsunami.

US Airways Group LCC.N President Scott Kirby told the Bank of America conference that consumers, concerned about conditions in Japan after the earthquake and turmoil in the Middle East, had delayed some travel in March and April, but demand was now picking up.

"As the shock effect of those events has receded from the headlines, the consumer is coming back and the leisure demand is starting to come back," Kirby said. "That's why you'll see strong results in May, and I hope you'll see strong results across the summer."

Southwest Airlines (LUV.N) also cited strong bookings for May and June.

Ray Neidl, a senior aerospace sector specialist with Maxim Group, said the upbeat comments on bookings boded well for second-quarter results.

"Despite steep increases in ticket prices and new economic uncertainty, demand has remained strong, enabling airlines to pass through the higher fuel costs," Neidl said.

Delta said it would cut capacity by 4 percent year over year after Labor Day, focusing on markets where revenue has not kept pace with higher fuel costs. United Continental said its capacity would be trimmed in the fourth quarter of this year.

Atlanta-based Delta said its trans-Atlantic joint venture with Air France-KLM (AIRF.PA) and Italy's Alitalia would cut passenger capacity by 7 to 9 percent this fall between Europe and the United States and Canada. Trans-Atlantic business was weak in the first quarter.

Shares of Delta rose 4.1 percent to close at $11.38 on Thursday. US Airways gained 6.7 percent to $10.32. United Continental shares were up 2.9 percent at $26.68, and American Airlines parent AMR Corp AMR.N shares added 2.1 percent to $6.72. Southwest shares rose 1.1 percent to $12.40. (Reporting by Karen Jacobs, editing by Dave Zimmerman and Matthew Lewis)

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