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Shrinking airlines mean higher fares, fewer routes

NEW YORK (Reuters) - By the time U.S. airlines are done cutting capacity and shrinking to survive record fuel costs, the U.S. commercial airline network will look a lot leaner and, for some consumers, a lot meaner.

That is because fares, especially on less crowded routes, are rising fast, and some flights may just disappear.

Analysts say that for the airlines, the new pricing power is long overdue -- and consumers will just have to accept that cheaper air fares have disappeared for now.

“The days of affordable flying are over for now, and leisure travel could become a luxury,” said Vicki Bryan, a bond analyst at Gimme Credit.

In a note to clients, Bryan said routes to as many as 30 cities across the country have been cut, citing statistics from the Bureau of Transportation.

United Airlines parent UAL Corp UAUA.O said last week it will slash its work force and domestic fleet, following similar cuts by rivals as the industry grapples with a weakening economy and oil prices that have doubled in the past year.

Over this year and next, UAL will reduce its mainline domestic capacity at least 17 percent.

UAL’s downsizing is consistent with recent steps taken by rivals.

AMR Corp's AMR.N American Airlines has said it will cut domestic capacity 11 percent or 12 percent in the fourth quarter and eliminate more than 1,000 jobs.

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

“As the airlines cut capacity and drive fares up, some people will be priced right out of the market and the airlines will go more for the business travel than the leisure travel,” said Patrick Murphy, principal of aviation consulting firm Gerchick Murphy Associates.

DANGER

Travelers flying between two noncompetitive markets over 1,500 air miles now pay at least $340 round-trip more than they did last December, according to Tom Parsons, chief executive of Bestfares.com, an Internet travel Web site.

Another airline analyst, Ray Neidl of Calyon Securities, said in an interview: “There is the danger that some very small markets may lose their commercial airline service, and that’s something the government has to address.”

Amid the unprecedented fuel costs, airline experts generally agree that U.S. airlines must cut capacity 20 percent and raise fares 20 percent just to stabilize.

Lehman Brothers analyst Gary Chase said the U.S. airline industry is undertaking a restructuring twice as large as it did in the years following the attacks of September 11, 2001.

In a recent note, Chase wrote that he expects the airline industry will need to raise almost $3 billion in new equity over the next 12 to 18 months to shore up liquidity.

Murphy added that major carriers will now focus on their hubs, international routes and business travelers.

“For them, it’s just hunker down and hold on and hope they can hold on to their cash longer than their competitors,” said Murphy. “Most of them feel they have enough cash to get through the year but if fuel continues to climb and doesn’t let up, even the major carriers at some point could run out of cash.”

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