March 1, 2011 / 2:28 PM / 8 years ago

American Air cuts capacity growth as oil rallies

ATLANTA (Reuters) - American Airlines parent AMR Corp AMR.N said it would cut planned capacity growth this year as the industry wrestles with higher oil prices.

An American Airlines jet touches down at the airport in Port-au-Prince February 19, 2010. REUTERS/U.S. Navy/Oscar Sosa/Handout

Most U.S. airline shares moved lower on Tuesday as oil prices continued their rise in wake of unrest in the Middle East. U.S. crude futures were up $1.46 at $98.43 a barrel. The Arca Airline index .XAL was down 1.4 percent.

“Now we’re at that range where oil becomes very detrimental to airlines’ costs,” said Morningstar analyst Basili Alukos. While airlines have rolled out fare increases in recent months, Alukos cited concern that higher prices could hurt air travel demand.

American Airlines said in a federal filing ahead of an investor conference presentation on Tuesday that consolidated capacity, which includes feeder aircraft, would be 1 percent lower for this year than previously disclosed. In January, the company had set a capacity rise of 4.3 percent for the year.

The carrier cited more international flying and said more fuel-efficient Boeing (BA.N) 737 planes would replace smaller, less efficient Boeing MD-80 planes. It added the lower planned capacity would put “modest pressure” on unit costs.

Last month, Delta Air Lines Inc (DAL.N) said it would cut its planned capacity growth for 2011 and accelerate retirements of older, less fuel efficient planes in the wake of higher fuel prices.

As fuel prices represent about one-third of operating costs for airlines, analysts are expecting lower capacity.

“Despite aggressive fare increases, we see little chance airlines will fully offset higher fuel expense without meaningful capacity cuts,” UBS analyst Kevin Crissey said in a note this week.

American also said passenger unit revenue rose about 4.5 percent to 5 percent in the first two months of this year compared with a year before.

The company said the revenue results reflect capacity increases by rivals during the first quarter and relatively strong growth last year that made for a more challenging comparison for 2011.

American said weather-related flight cancellations have reduced revenue by about $50 million in January and February of this year.

Shares of AMR were off 2.5 percent at $6.57 in morning trading and US Airways Group LCC.N fell 3 percent to $8.35. United Continental Holdings UAL.N was down 2.3 percent to $23.51, and Delta was off 2.8 percent at $10.93.

Reporting by Karen Jacobs, editing by Gerald E. McCormick, Dave Zimmerman

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