Airlines limit capacity despite strong Q2

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Despite a strong financial showing for this year's second quarter and the promise of similar results through the rest of the year, airlines are still keeping a lid on capacity growth.

Airline executives said they fear the economic recovery is still fragile while fuel prices remain volatile, and there is no rush to replace the capacity that carriers took out of their networks during the 2008 fuel spikes and subsequent recession.

"Maintaining capacity restraint in the face of a recovering economy is at the core of improving our financial results," Delta President Edward Bastian said during the airline's earnings call with Wall Street analysts.

Delta reported net earnings of $467 million, reversing a $257 million loss reported a year ago.

Delta's second-quarter systemwide capacity was down 0.6% from the same period last year.

"For the full year 2010, we anticipate system capacity to be up 1% to 1.5%, and for the full-year 2011 we are budgeting capacity to be up about 1% to 3% for the system," Bastian said. "We will maintain capacity discipline."

At United, CFO Kathryn Mikells told analysts, "Capacity constraints have been one of the cornerstones fueling our performance, and we've remained committed to it."

That constraint, Mikells said, its one of the reasons the airline reported a quarterly profit of $273 million, up from $28 million a year ago, very nearly the proverbial 1,000% increase.

"For the full-year 2010, we increased our capacity guidance slightly and expect mainline capacity to be down 1.4% to 2.4%", Mikells said.

About half of that small increase, she said, is due to the extra capacity associated with the carrier's enhanced codeshare agreement with Aer Lingus.

Airline executives said they cannot plan on substantially increasing capacity as long as fuel prices continue to roller-coaster.

"We don't predict that because it's impossible to predict," Delta CEO Richard Anderson said.

Especially troubling, executives said, are the increases this year compared with last.

"Average mainline jet fuel price for the [second] quarter, excluding hedges, was $2.30 a gallon, up from $1.63 a gallon last year, an increase of more than 40%," Mikells noted.

Still, carrier executives said they've seen ample evidence of an economic recovery.

"Our advance bookings are up about one percentage point versus last year, with domestic flat and international up about 2.5 points," American President Tom Horton told analysts as the carrier announced a $10.7 million loss.

"Importantly, we are seeing strong bookings across the entire quarter, particularly in September."

United Executive Vice President John Tague told analysts, "We see continuing evidence of a strong revenue recovery as we look across our system for the third quarter. The numbers look very encouraging, particularly in the July and August period."

At Delta, executives said they're seeing levels of demand and yield returning to what they considered to be normal.

"We anticipate continuing revenue improvement as the economy stabilizes and we expect to be solidly profitable for the full year," Bastian said.

"We're making the right changes across our business to build a sustainable cost structure and advance bookings remained strong across the system, which is a reflection of both the improving economy as well as our efforts to balance the network to match capacity with demand," he said.

This report appears in the July 26 issue of Travel Weekly.

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