Economy keeps U.S. air fare outlook murky

By Kyle Peterson - Analysis

CHICAGO (Reuters) - Deep into the seasonally weak winter travel season, U.S. airlines face an uncertain future, colored by an economic recession that seems to be killing demand faster than airlines can cut capacity and buttress fares.

Major carriers lopped off large chunks of their operations late last year and continued to cut in the first quarter.

The strategy worked to some degree. Base fares are up from a year ago -- as much as 25 percent for routes between major cities. But some airline executives and experts are losing confidence carriers can keep fighting the recession this way.

"Essentially it's a race between capacity cuts and the ability to retain pricing power," said airline consultant Robert Mann.

"They're losing their edge because the demand destruction seems to be exceeding the amount of capacity cuts, at least in recent weeks," Mann added, noting travel usually drops off in January and February.

Airline executives also have acknowledged the challenges they face in bolstering fares.

"This year you're certainly not going to see fares go higher," Bob Fornaro, chief executive of AirTran Holdings Inc (AAI.N), said in interview with Reuters. "You're going to see more discounting. I think what that will mean is the average fare in 2009 will go lower."

Rick Seaney, chief executive of air fare research site FareCompare.com, noted there were many fare sales this year. Airlines are offering deeper discounts than usual and sales are lasting longer.

"We basically have seen week after week after week of air fare sales," Seaney said. "Typically, on most routes, they're down anywhere between 15 percent and 40 percent."

HOPEFUL SIGNS FOR AIRLINES

The airline industry shrank rapidly in 2008 to offset fuel bills that soared as oil prices shot to a record high in July. A 75 percent decline in the oil price in the second half was welcome relief, but more pain came in the form of the economic downturn.

The top six U.S. airlines reported nearly $4 billion in fourth-quarter net losses, although much of that was due to accounting charges for diminished fuel hedge values.

As they detailed their losses last month, top carriers unveiled new plans to cut capacity.

Delta Air Lines Inc (DAL.N), which slashed its domestic supply by 11 percent in the second half of 2008, said it would cut total mainline capacity by another 6 percent to 8 percent in 2009.

AMR Corp (AMR.N), parent of American Airlines, said its mainline capacity would decrease more than 8.5 percent in the first quarter. Southwest Airlines Co (LUV.N) said it would cut first-quarter capacity by 4.4 percent.