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Monday, May 26, 2008

American Eagle Capacity to Decline by 10-11 Percent

AMR is retiring 35 to 40 regional jets as well as an unspecified number of turboprops as part of its efforts to cope with rising fuel costs that reached $135 a barrel on Wednesday. The move is coupled with the retirement of at least 40 to 45 mainline jets, mostly MD-80s but also some Airbus A300s. AMR regional affiliate capacity is expected to decline by 10 percent to 11 percent in the fourth quarter compared to fourth quarter 2007 levels. Previously, regional affiliate capacity in the fourth quarter was expected to increase by 2.0 percent from 2007 levels. American has been unable to sell its American Eagle operation since it announced its intention last November. Related Story The move follows a similar announcement earlier this year in which Delta said it will spin out 70 smaller regional jets by this fall.
An analysis by USA Today indicates that the oft-predicted decline of the 50-seat regional jet may be at hand which will mean many communities will lose air service. Regional Airline Association member airlines operate 50 percent of the nation’s scheduled flights, fly 40 percent of the commercial passenger fleet and carry more than one of every five domestic passengers. Some 450 communities rely exclusively on regional airlines. Nearly 30 cities across the country have completely lost scheduled air service in the past year, said the Air Transport Association (ATA) during the Energy Day on Capitol Hill. (See related story RAA Joins Consumer Energy Alliance) USA Today’s Dan Reed said that over half of 50-seat aircraft fly routes with 75 or fewer daily passengers, meaning fare increases would wipe out demand “below the threshold for just one or two flights a day in such markets.”
Teal Group Analyst Richard Aboulafia told Reed that smaller cities within two-to-three hours of a larger airport would be most at risk as travelers divert to the usually lower expense at larger airports. He expects all hub-bypass flying such as the branded flying done by Horizon and ExpressJet will be eliminated. Related Story He used American’s recent cancellation of Northwest Arkansas-Raleigh/Durham as an example.
"You can probably fly a 70-seater for very close to what you can fly a 50-seater," says Kit Darby, president of Air Inc., told USA Today. "What you'll likely see more of is … fewer flights each day on 70-seaters instead of 50-seaters. That way, they can capture the passenger demand that is there, but at overall lower operating costs."
Boyd Group President Michael Boyd has long predicted the death of 50 seaters and expects the elimination of nearly 60 percent shrinkage in the 2,300-aircraft U.S. fleet in six years, according to Reed. In 1999, Boyd predicted the elimination of 1,200 smaller RJs, nearly half the fleet, by 2018 but he recently revised his estimate to 1,700 by 2013.
American’s capacity changes will result in workforce reductions at both American Airlines and American Eagle and could result in facility closures or facility consolidation. AMR is assessing the scope and location-specific impact of any workforce reductions. In addition, AMR is assessing the impact of these capacity reductions on its overall cost outlook.
"The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy," said AMR Chair and CEO Gerard Arpey. "Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve. We must work to overcome our near-term challenges and to secure our company's long-term future for the benefit of our shareholders, customers and employees. We must find ways to cover the cost of providing our services so that we can remain viable and have the resources to reinvest in our company for the future. Those goals are central to the actions we are outlining today."
American Airlines will cut domestic capacity in the fourth quarter of 2008 by 11 percent to 12 percent, compared to the fourth quarter of 2007. According to its April 16 guidance, AMR previously expected domestic mainline capacity in the fourth quarter to decline only 4.6 percent. Even so, JP Morgan Analyst Jamie Baker, who predicts the industry will lose a record $7.2 billion this year, estimates a need for 20 percent capacity cut to adjust for current fuel prices.
Since AMR released its first quarter 2008 financial results on April 16, American has participated in or led 15 fare increases, 14 of which were at least partially successful. Last week it also introduced a $15 fee for the first checked bag exempting top mileage and full-fare customers. American is also increasing fees for certain other services, ranging from reservation service fees to pet and oversized bag fees. The increases mostly range from $5 to $50 per service. The company estimates that new and increased fees announced this month will generate several hundred million dollars in incremental annual revenue.
As evidence of the crisis caused by soaring fuel prices, Arpey cited the U.S. airline industry's first quarter 2008 pre-tax loss of nearly $2 billion excluding special items and the fact that eight U.S. airlines that have filed for bankruptcy protection this year, including five that have ceased service. AMR paid $665 million more for fuel in the first quarter than it would have paid at prices from the year-ago period. Its first quarter fuel expense increased by 45 percent year over year, while its total revenue increased by 5 percent. The price of jet fuel has increased by more than 10 percent since April 16, when AMR expected its 2008 fuel bill would be well over $6 billion higher than in 2003.
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