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The Honolulu Advertiser
Posted on: Wednesday, December 5, 2007

Airlines scaling back in U.S., turning to global expansion

By David Koenig
Associated Press

Hawaii news photo - The Honolulu Advertiser

Airlines are feeling overcrowded by rivals in a U.S. market that is expected to shrink as the economy slows.

ADVERTISER LIBRARY PHOTO | November 2000

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DALLAS — Several major airlines outlined plans yesterday to slow their growth and cut costs to deal with higher fuel prices and the prospect of an economic slowdown.

Executives of some carriers also said they are actively planning for airline mergers, although they were careful not to discuss specific combinations.

"We are not standing around waiting for consolidation to happen. We're interested in that," said Jake Brace, chief financial officer of United Airlines.

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 in the summer of 2005.

But the big traditional carriers are facing ever-tougher competition from low-cost carriers that 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 is expected to grow 4 percent 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 were mirrored in numbers late Monday from Houston-based Continental Airlines Inc., which also cut its growth expectations for 2008 to between 2 percent and 3 percent, down from 3 percent 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 from last November to 80.4 percent.

"Our load factors are still pretty good," Continental's chief financial officer, Jeff Misner, said yesterday 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, and so can 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 roundtrip 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 AmericaWest — said the industry would be helped most if overlapping airlines merge and eliminate 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.