Tuesday, October 11, 2011

American to Deepen Seat Cuts on Weak Economy, Pilot Losses

Oct. 11 (Bloomberg) -- AMR Corp.’s American Airlines joined its bigger U.S. peers with deeper seating cuts and said it would ground 11 jets in 2012 as it faces a weak economy, more pilot retirements and higher fuel costs.

The fourth-quarter capacity reduction of 3 percent means that 2011 costs for flying each seat a mile will increase “modestly” beyond the forecast of as much as 10.1 percent provided on Sept. 21, Fort Worth, Texas-based American said yesterday in a statement, without elaborating.

United Continental Holdings Inc. and Delta Air Lines Inc., the world’s biggest carriers, moved earlier to pare seating into 2012 on concerns the economy will sap travel demand. American, the third-largest U.S. airline, also is grappling with a tenfold jump in pilot retirements in the past two months.

“The adverse effect on previous unit-cost guidance will be significant,” Robert W. Mann, president of consultant R.W. Mann & Co., said in an e-mail. The effect on revenue can’t be estimated without details of the schedule changes, he said.

American’s reductions represent “sizable capacity cuts to AMR’s fall and winter schedules,” said Mann, of Port Washington, New York. With business travel and unit revenue both reported to be strong, the airline’s pullback suggests that a shortage of pilots is a primary driver, Mann said.

Trimming Capacity

American said less than a month ago it would trim fourth- quarter capacity by 0.5 percent while reviewing 2012 plans. That cut flying by varying amounts on lower-demand travel days and included a 13 percent drop in Saturday seating, Treasurer Beverly Goulet said on Sept. 13.

“We expect these capacity reductions to be positive for the airline sector, as the industry continues to proactively cut capacity in light of higher year-over-year fuel prices,” Helane Becker, a Dahlman Rose & Co. analyst, said in a report today. “This should enable airlines to maintain the current pricing structure.”

Becker, who is based in New York, rates the shares as “sell.” AMR slid 2 percent to $2.48 at 8:51 a.m. in early New York trading. The stock tumbled 68 percent this year through yesterday.

American had 111 pilot retirements in September and 129 this month as workers sought to protect the value of their pension plans, a portion of which is linked to stock market movement.

No City Changes

The airline “doesn’t anticipate” leaving any markets as a result of the reductions, said Sean Collins, a spokesman. It will rely primarily on cutting flights based on days of the week, trimming frequencies or moving to smaller planes, he said.

“We are taking these additional steps in light of the uncertain economic environment, ongoing high fuel costs and to ensure we run a reliable schedule for our customers given additional pilot retirements we anticipate throughout the fourth quarter,” Chief Commercial Officer Virasb Vahidi said in the statement. He said advance bookings are “generally in line” with 2010.

American also said it will take a $29 million noncash charge in the third quarter for contracts linked to fuel purchases and $22 million related to foreign exchange.

The airline will retire 11 of its 124 Boeing Co. 757s. The twin-engine, single-aisle planes are often flown on transcontinental routes and to non-U.S. destinations such as Mexico. Boeing built the last 757 in 2004.

American in 2013 will begin receiving the first of 460 new aircraft it ordered in July from Airbus SAS and Boeing. The planes will be more fuel efficient than the 757s, with an average age of 16 years.

With the new seating cuts, full-year seating on American’s mainline jets still will rise 0.4 percent. That’s less than the original 3.5 percent growth set for 2011, according to the company. When regional carrier American Eagle is included, full- year capacity will be up 1.2 percent, lower than the initial plan of more than 4 percent.

http://www.businessweek.com

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