Airlines Cut Costs to Offset Fuel Prices
Tuesday December 4, 6:53 pm ET
By David Koenig, AP Business Writer
Airlines Cut Capacity Growth, Other Costs to Offset Higher Fuel Prices, Economic Fallout


DALLAS (AP) -- Several major airlines outlined plans Tuesday to slow their growth and cut costs to deal with higher fuel prices and the prospect of an economic slowdown that could hurt air travel.
Executives for some carriers also said they are actively planning for airline mergers, although they were careful not to discuss specific combinations.

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"We are not standing around waiting for consolidation to happen," said Jake Brace, the chief financial officer of United Airlines. "We're interested in that. But we're focused on our business plan."

Brace said United, a unit of UAL Corp., has no plans to expand its flying in the highly competitive U.S. market, but intends to expand about 15 percent internationally over the next three years.

Delta Air Lines Inc. is also looking to increase its international flying from 25 percent of capacity in 2005 to 40 percent next year.

After heavy losses from 2001 through 2005, U.S. airlines have returned to profitability. They had a great summer-vacation season. Third-quarter earnings were the best in several years, as planes were nearly full and passengers paid higher average fares than they did in the summer of 2005.

But the big traditional carriers are facing ever-tougher competition from low-cost carriers who are expanding rapidly and holding down fares. Executives of the big carriers warned that their comeback is threatened by high fuel costs and uncertainty over the economy.

"We are concerned about growing evidence of slowing economic growth that would inevitably affect passenger demand, coupled with a surge in energy prices," said Southwest Airlines Co. Chief Executive Gary C. Kelly.

Kelly's comments came as Southwest announced its capacity would grow 4 to 5 percent next year. It had initially forecast growth of 8 percent and later scaled back to 6 percent.

Southwest also reported that November traffic grew 2.6 percent, measured by miles flown by paying passengers. That growth, however, failed to keep up with a 6.4 percent increase in capacity.

As a result, average occupancy on Southwest flights slipped to 69.3 percent from 71.8 percent in November 2006.

Those results mirrored numbers late Monday from Houston-based Continental Airlines Inc., which also cut its growth expectations for 2008 to between 2 and 3 percent, down from 3 to 4 percent. The entire increase will be international -- the carrier said it will shrink domestic capacity.

Continental also said its average occupancy or "load factor" in November slipped 0.7 percent to 80.4 percent from last November.

"Our load factors are still pretty good," Continental's chief financial officer, Jeff Misner, said Tuesday at an investor conference in New York. "I'm not sure we're ready to declare a downturn by any stretch."

Misner added that when the industry's next slump hits, it won't be as bad as previous ones because carriers have cut costs, allowing them to earn profits even at current high fuel prices.

Also, he said, fares have less room to fall than they did a few years ago, when a round trip between Houston and Newark, N.J., could cost $2,200, Misner said.

"Now I've got to take you for $400," he said. "The fares aren't going to fall by half; they already did that."

Analysts say airlines could boost fares if there weren't so many competing flights.

Scott Kirby, president of U.S. Airways Group Inc. -- part of the last major airline merger, with America West -- endorsed that view. He said the industry would be helped most if overlapping airlines merged and then eliminated redundant service.

Thomas Horton, CFO of American, the largest U.S. airline, said there would be ample competition even with consolidation.

"You've got, I think, a lot more carriers than need to exist in a healthy industry," Horton said.

To cut costs, AMR Corp.'s American is cutting up to 300 management jobs by year end, according to a spokesman, and Delta said it is freezing hiring in some areas to deal with high fuel costs.

Another hot topic in the industry is the sale of sideline businesses.

Northwest Airlines is considering selling its mileage program, said CFO Dave Davis. AMR announced last week it intends to shed its American Eagle airline. United's Brace said his company has held talks with numerous parties interested in buying its maintenance unit and expects to receive multiple bids soon.

Shares of Continental rose 42 cents, or 1.54 percent, to close Tuesday at $27.69; Southwest gained 7 cents to $13.80; and UAL shares added 17 cents to $39.98.

Shares of Delta fell 97 cents, or 4.95 percent, to $18.61; AMR Corp. lost 73 cents, or 3.6 percent, to $19.57; and Northwest shares lost 28 cents to $17.80.

AP Business Writers Dave Carpenter in Chicago, Harry Weber in Atlanta and Joshua Freed in Minneapolis contributed to this report.


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