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U.S. airlines trim service, restrain growth

A man looks at a monitor for arrival and departure flight information at the Delta airline terminal at JFK Airport in New York
A man looks at a monitor for arrival and departure flight information at the Delta airline terminal at JFK Airport in New York

By Karen Jacobs

ATLANTA (Reuters) - U.S. airlines, hoping to offset high fuel costs and potentially sagging travel demand, have taken a scalpel to their route structures once again.

The service reductions go hand in hand with another stated goal -- adding service only where travel demand justifies it. These measures reflect a defensive posture by airlines in uncertain economic times, and show remarkable restraint for the once-bloated industry.

"Now airlines are making much more surgical decisions route by route and region by region," said Mark Dunkerley, chief executive of Hawaiian Holdings Inc , which provides air service to Hawaii from the U.S. mainland and among the Hawaiian Islands.

Major carriers such as Delta Air Lines Inc and Southwest Airlines Co have scaled back some of their planned flying this year, and analysts say more capacity cuts may be on the way.

"We expect the airlines to follow through on the capacity cuts they've already announced," said Helane Becker, an airline analyst with Dahlman Rose & Co. "And we expect that if either oil prices go higher or demand goes lower, they will cut capacity more."

She said capacity cuts announced so far by airlines should offset an oil price spike as high as $115 per barrel. If oil prices topped that level, "they'd really have to start moving prices up again, and that would result in demand destruction six months later."

NYMEX crude, to which jet fuel prices are tied, was down 1.1 percent to $86.81 per barrel in afternoon trading.

Airline stocks, which have hit new year-lows in recent weeks amid fears of a fresh economic slowdown following Standard & Poor's U.S. credit downgrade, were mostly higher on Tuesday, with the Arca Airline index <.XAL> up 0.5 percent.

The industry is clinging to stability after a decade-long downturn that finally began to reverse after massive downsizing beginning in 2008.

United Continental Holdings Inc and Delta have both planned service cuts with international joint-venture partners for the fourth quarter.

In the United States, Delta plans to pull flights in some smaller markets to stem millions in annual losses associated with them. Southwest is also adjusting its schedule, saying last month it would cut routes from Philadelphia to four U.S. cities in January.

Wolfe Trahan analyst Hunter Keay said in a recent note to clients that United Continental and Delta might in coming weeks announce plans for no capacity growth, or even shrinkage, for 2012.

CHASING TRAVEL DEMAND

Amid the economic jitters, airlines are looking to raise fares, dump less fuel-efficient planes and seek out new revenue streams. That means letting demand trends dictate where service grows and avoiding routes that do not see sufficient traffic.

AMR Corp , parent of American Airlines, has pinned its entire recovery strategy on this concept. The U.S. airline is growing mainly at key hubs and on routes that are important to business travelers.

Last week, Delta set an expanded commercial relationship with Aeromexico in hopes of gaining market share in fast-growing Mexican and Latin American markets. Delta also plans to expand its plane maintenance-repair business with the Mexican airline and is taking is a 3.5 percent stake in it.

"We aren't doing business the same way we always have," Delta CEO Richard Anderson said in a recent staff message. "We're looking for innovative, smart ways to strengthen our business for the long term."

Hawaiian Holdings has expanded in Asia, starting up service to Osaka, Seoul and Tokyo within the past year. The new routes are performing above expectations and supporting Hawaiian's view that Asia, with its economic growth and rising standards of living, will provide future travelers to Hawaii as other regions sputter, the company said.

"We are growing where we see opportunities to grow and standing pat where we think traffic will be robust but won't grow," said CEO Dunkerley.

(Additional reporting by Kyle Peterson in Chicago, editing by Gerald E. McCormick)

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