Delta and United reduce capacity amid demand concerns

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Delta Air Lines and United Airlines in the past week alone reduced on a combined basis "about 1% of their seats" for the second half of the year, according to Rodman & Renshaw analyst Dan McKenzie, who cited "the darkening economic outlook" as the trigger for the cuts in capacity.

The carriers are pulling capacity ahead of an expected demand slowdown in the post-Labor Day shoulder season to try to maintain a firm grip on pricing, McKenzie reasoned.

"It's evident the two carriers are continuing to take steps to support pricing in the back half of the year to compensate for the weaker economic backdrop," McKenzie said.

JP Morgan analyst Jamie Baker in a Tuesday research note forecasted "softer demand" for the second half of the year. "It seems logical that the post-Labor Day resumption of corporate travel may not prove as robust as in prior years," he said.

Despite demand concerns, UBS analyst Kevin Crissey in a research note on Wednesday affirmed, "We don’t see a collapse in pricing yet," noting that average fares for July and August were up year over year by mid-single-digit percentages.

Fourth-quarter available seats provided by the 10 largest U.S.-based passenger airlines are expected to grow 1% year over year, but the new cuts from Delta and United reduced that rate from the previously anticipated 2.5%, McKenzie noted.

"Airlines are continuing to make network adjustments in 4Q, so it's still too early to draw firm conclusions about what capacity will ultimately look like," he added.

As for the third quarter, McKenzie noted that year-over-year capacity offered by those 10 carriers "now shrinks 1% or more each month through September, even after factoring in aggressive growth by Virgin, Spirit and JetBlue."

Among the newly revealed cuts, Delta effective Aug. 30 will cancel its five weekly Detroit-Hong Kong flights, according to schedule updates posted on UBM Aviation's Airline Route website. Those cuts follow other recent Delta reductions focused on the transatlantic.

Though McKenzie did not indicate where United intends to trim capacity, the Airline Route website showed a slew of transatlantic reductions for the winter 2012-13 season, including reduced weekly frequencies on Chicago–Amsterdam, Newark–Berlin, and separate services from Washington Dulles to Dublin, Frankfurt and Manchester; the cancellation of Newark–Copenhagen; and the seasonal winter suspension of Newark–Rome and Washington Dulles–Moscow.

Source: Business Travel News

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