U.S. airlines to fare better than global carriers

By Deepa Seetharaman - Analysis

NEW YORK (Reuters) - U.S. airlines are expected to fare better than most of their foreign counterparts this year because they are trimming unprofitable routes and beefing up balance sheets as the economy begins to rebound.

U.S.-based carriers have been cutting capacity since last year in response to surging oil prices, while most European and Asian carriers have been slower to reduce flights or fly smaller aircraft on their routes.

In the fourth quarter, domestic capacity is expected to fall to levels unseen since after the September 11 attacks, when airlines saw air travel demand crumble, according to the Air Transport Association.

With fewer seats for sale, airlines could begin to raise fares and draw more revenue, especially as an appetite for travel returns.

"The U.S. airlines have done so much more than the international airlines to improve their own outlook," said Helane Becker, an analyst with Jesup & Lamont Securities.

"Those guys are just cutting capacity now," she added, referring to European carriers. "They're almost a year later than U.S. airlines."

U.S. airlines could still end 2009 in the red, experts warned. Industry executives and analysts say this year is among the industry's worst.

But this week, Continental Airlines Inc (CAL.N) said declines in its "high-yield" or premium traffic, a good proxy for higher-margin tickets such as business and first-class, were beginning to slow and Delta Air Lines Inc (DAL.N) and UAL Corp's (UAUA.O) United Airlines said costs were falling due to lower fuel prices.

Stifel Nicolaus said in a note on Friday that Continental could be profitable in the third quarter. Other analysts say carriers could report lower third-quarter losses than previously expected.

Many analysts now expect losses at U.S. carriers to be less steep than those of foreign rivals.

The Arca Airline Index .XAL has jumped 23 percent this month on signals of improved demand and September so far is the index's best month since July 2008.

CUTTING CAPACITY, RAISING LIQUIDITY

U.S. carriers have cut domestic capacity 12 percent in the past two years in response to the spike in oil prices last year and the drop-off in consumer spending this year, ATA data shows.

Airlines have cut jobs, wages and introduced early- retirement options for some employees, similar measures were used to cut costs after the September 11 attacks.

North American airlines are expected to lose $2.6 billion this year, much narrower than the $9.5 billion they lost in 2008 when they were among the first to feel the pinch of the recession.