x Abu Dhabi, UAEWednesday 26 July 2017

US airlines better placed for recovery than rivals abroad

European and Asian carriers have been slower to react Deepa Seetharaman Airlines in the US are expected to fare better than most of their foreign counterparts this year, because they are trimming unprofitable routes and beefing up their balance sheets as the economy begins to rebound. US-based carriers have been cutting capacity since last year in response to surging oil prices, while most European and Asian carriers have been slower to reduce flights or fly smaller aircraft on their routes.

Capacity is expected to fall on routes in the US in the last three months of this year to levels unseen since after the attacks of September 11 2001, when airlines saw air travel demand crumble. With fewer seats for sale, airlines could begin to raise fares and draw more revenue, especially as an appetite for travel returns. Helane Becker, an analyst with Jesup and Lamont Securities, said: "The US airlines have done so much more than the international airlines to improve their own outlook."

European carriers "are just cutting capacity now", she said. "They're almost a year later than US airlines." Airlines in the US could still end this year in the red, experts predict. Industry executives and analysts say this year is among the industry's worst. But this week, Continental Airlines said declines in its "high-yield" or premium traffic, a good proxy for higher-margin tickets such as business and first class, were beginning to slow, and Delta and United said costs were falling because of lower fuel prices.

The American investment bank Stifel Nicolaus said in a note last week that Continental could be profitable in the third quarter. Other analysts said carriers could report lower third-quarter losses than previously expected. Many analysts now expect losses at American carriers to be less steep than those of foreign rivals. The Arca Airline Index has jumped 23 per cent this month after signals of improved demand, meaning that so far September is the index's best month since July last year.

American carriers have cut domestic capacity 12 per cent in the past two years in response to the rise in oil prices last year and the drop-off in consumer spending this year, data from the Air Transport Association show. Airlines have cut jobs, wages and introduced early retirement options for some employees, the same sort of measures used to cut costs after the September 11 2001 attacks. North American airlines are expected to lose US$2.6 billion (Dh9.55bn) this year, much less than the $9.5bn they lost last year when they were among the first to feel the pinch of the recession.

European carriers, on the other hand, are expected to lose $3.8bn. The heavy reliance of US carriers on domestic traffic rather than international business has also helped them, as the global recession hurt international travel more, analysts said. Airlines in the US are also now seeking ways to drum up cash. United said it had initiatives to improve its liquidity lined up for the fourth quarter and Continental announced a sale of shares last month. American Airlines said last week it had raised $2.9bn in cash and financing and would focus on more profitable routes.

The industry in the US may also be cutting capacity another 3 per cent to 5 per cent, with more cuts coming from the international side, said Basili Alukos, an analyst with Morningstar. "The domestic market is in a better situation and I think more in equilibrium with supply and demand," he said. * Reuters