UPDATE 3-UAL shrinks business, cuts staff to offset fuel

(Recasts; adds background, analyst comment, share price)

By Kyle Peterson

CHICAGO, June 4 (Reuters) - United Airlines parent UAL Corp (UAUA.O) will slash its work force and domestic fleet, following similar cuts by rivals as the industry grapples with soaring fuel costs and a weakening economy, the company said on Wednesday.

The plan, which pushed UAL shares up 9 percent, calls for reducing domestic capacity by 14 percent in the fourth quarter.

That means the elimination of 100 planes from the fleet as well as 1,400 to 1,600 job cuts. Included in the plan are the previously announced layoffs of 500 salaried and management employees and the retirement of 30 Boeing 737s.

"With fuel at historically high levels, United and our competitors need to redefine ourselves in this marketplace," UAL Chief Executive Glenn Tilton said in a message to employees. "The answers are not easy, yet this environment demands that we and the industry act decisively and responsibly."

UAL lost $537 million in the first quarter and has been in merger talks with rivals to try to bolster its competitive position amid rising fuel costs.

However, the company recently ended discussions with US Airways Group (LCC.N), saying last week that it would not seek a merger now. Upon announcing the decision, Tilton promised to "size the business appropriately."

UAL said it expected to retire all of its 94 single-aisle Boeing (BA.N) 737s if it can reach a deal with lessors. It also will retire six Boeing 747 jumbos.

Over this year and next, UAL will reduce its mainline domestic capacity by 17 percent or 18 percent and shrink consolidated capacity -- which includes regional flying -- by 9 percent or 10 percent.

OTHER CAPACITY CUTS

UAL's downsizing is consistent with recent steps taken by AMR Corp's (AMR.N) American Airlines, which said last month it would cut its domestic capacity by 11 percent or 12 percent in the fourth quarter and eliminate more than 1,000 jobs.

In March, Delta Air Lines (DAL.N), which plans to merge with Northwest Airlines NWA.N, said it would cut 2,000 jobs through voluntary retirement and reduce domestic capacity by 10 percent this year.

Airline experts generally agree that the industry must cut its capacity by 20 percent and raise fares by 20 percent to stabilize.

"We were pleasantly surprised by the magnitude of the (UAL) cuts," said Standard & Poor's analyst Jim Corridore. "This could really allow for for some strong pricing gains" because of the potential for fare hikes.

S&P raised its price target for UAL to $12 from $10. The stock was up 77 cents at $9.30 in afternoon Nasdaq trade.

The airline industry began recovering from a years-long downturn in 2006 as carriers cut capacity on competitive domestic routes and raised ticket prices accordingly.

A spike in the price of crude oil, which is directly linked to the price of jet fuel, eroded some of financial progress airlines have made. And the prospects for weaker travel demand as the economy slows threatens to undo the gains altogether.

Before AMR and UAL's actions, airlines had been cutting capacity for more than a year, but by smaller percentages. The big reductions by the two largest U.S. carriers may prompt others to make similar moves.

"We could see the other majors increase the magnitude of their cuts," Corridore said.

The airline sector was broadly higher, with the Amex airline index .XAL rising 3.5 percent. (Additional reporting by Bill Rigby; Editing by Lisa Von Ahn)