Airlines look to increase capacity in the second half of 2010

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Watching the recession slowly vanish in their rear window, airline executives said this week that they expected to restore capacity, break into new markets and expand existing frequencies in the latter half of the year, providing that fuel prices remain in check.

Both low-cost carriers and network airlines cut capacity significantly from the last half of 2008 through all of 2009 and even into the first months of this year. It started as a reaction to fuel-price hikes and then continued as the recession dampened demand.

But now, carrier executives said their bookings are returning to the levels of two years ago, and they expect to put more seats in the air in the second half of 2010.

The one particularly promising trend is the re-emergence of the corporate traveler and the higher yields those customers bring.

"Corporate sales were up 63% at the end of May," Delta President Edward Bastian told investors and analysts at the Bank of America Merrill Lynch airline investors’ conference in New York. "Volume is up 39%."

Southwest CFO Laura Wright told conference attendees, "We had a year-over-year improvement in yields for the first time in over a year."

Even so, executives warned that surging traffic and better financial numbers will not drive them to simply add capacity throughout the system. They plan to pick their spots.

"We’re very specific," AirTran CEO Bob Fornaro told conference attendees.

"You have to be careful about adding new capacity," Alaska CEO William Ayer said. "You can’t grow yourself into profitability."

For low-cost carriers like AirTran and Southwest, that means adding or redeploying capacity to smaller, niche markets where they can charge premium prices.

AirTran will continue to wage its battle to win Milwaukee. Southwest will concentrate on opening new markets like its service to Spartanburg, S.C.

"We don’t have to make 20 to 30 flights a day to make those markets work," Wright said.

For the large network airlines, though, the focus will be on big markets such as New York and the international arena.

Bastian told conference attendees the strongest growth segment has been international service, especially Asia traffic.

All of this optimism, though, will wither if there’s another fuel-price spike. While airline executives said they were hedging against such a possibility, they acknowledged that prices remain too volatile to strike an appropriate or safe hedge amount.

As Fornaro put it, "Nobody knows if it’s going down to $50 [a barrel] or up to $110."

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