September 30, 2005

US airlines look to cut flights, up fares

By Christian Plumb and Janet McGurty

NEW YORK (Reuters) - American Airlines plans to cancel 15
daily round-trip domestic flights from its two largest hub
airports because of the skyrocketing price of jet fuel, the No.
1 U.S. air carrier said on Friday.

Rival Continental Airlines Inc. said it was eyeing similar
flight cutbacks, adding that it had also responded to the fuel
surge by raising domestic fares. American and bankrupt Delta
Air Lines Inc. both said they were matching the $20 round-trip
fare hike.

Refinery outages caused by Hurricanes Rita and Katrina have
made worse an already bad situation for U.S. airlines. In
addition to record crude prices, the airlines are paying as
much as a 60 percent premium for refined jet fuel.

Surging fuel prices helped push Delta and Northwest
Airlines Corp. into bankruptcy earlier this month, briefly
leaving American and Continental as the only solvent U.S.
"legacy" carriers.

Many pipelines that carry jet fuel and other petroleum
products from the U.S. Gulf to other regions are closed or
running below full capacity because of power outages or other
storm-related problems.

This means that tanker trucks will have to be used to carry
the product into airports, adding to the cost.

"If airlines aren't feeling the pinch now, they will be,"
said one Gulf Coast jet trader, who said airlines will take on
fuel wherever they can get it.

U.S. cash prices for jet fuel stood at $117.00 a barrel on
Friday, based on the October heating oil contract on the New
York Mercantile Exchange.


"We're paying enormous amounts for jet fuel right now,"
said John Heimlich, chief economist at trade association ATA.
"It's insane."

The airlines are asking the U.S. government to give them a
one-year tax holiday from a 4.3 cent a gallon federal tax,
which would save the industry $600 million annually.

Fort Worth-based American, owned by AMR Corp., said the
cancellations would take effect October 5 and last at least
through October 29.

After that, flights from Dallas/Fort Worth and Chicago's
O'Hare to destinations including Atlanta, Newark and Toronto
could be restarted depending on what happens with fuel prices.

In addition to the cancellations to those airports, which
will still be served by other American Airlines flights, AMR
said it plans to discontinue service between O'Hare and Nagoya,
Japan, at the end of October, also because of fuel.

Calyon Securities analyst Ray Neidl attributed AMR's move
to its inability to raise ticket prices enough to offset energy
costs, noting that Delta and Northwest would use bankruptcy to
scale back capacity even more aggressively.

"American is basically still restructuring, it's just that
they're doing it outside of the bankruptcy process," he said.

AMR shares rose 43 cents, or 4.0 percent, to close at
$11.18 on the New York Stock Exchange, while Continental gained
24 cents, or 2.6 percent, to $9.66, both outperforming the Amex
Airlines index, which rose 2.3 percent.

A spokesman for Northwest noted that it has also suspended
service between New York's JFK International Airport and Tokyo,
among other international flights, due to fuel prices.


Delta spokeswoman Chris Kelly said the Atlanta-based
carrier has been selectively canceling flights for which there
is limited demand and where there is minimal customer impact,
in an effort to conserve fuel.

UAL Corp.'s United Airlines, also operating in bankruptcy,
said it was not mulling any service cuts but was studying the
fare increase.

Crude oil prices have risen but strong demand combined with
a bottleneck in refining capacity has pushed prices of
gasoline, heating oil, and jet fuel to record high levels.

And it expected to get worse.

The back-to-back hurricanes damaged some U.S. Gulf Coast
area refineries, shutting about 18 percent of U.S. capacity.

Of this, about 2.09 million barrels, or 12 percent of
refining capacity will not be restarting for several weeks,
leaving a supply shortfall and forcing providers to parcel out
or even cancel on some obligations, Gulf Coast traders said.

"The bigger airports -- Atlanta, Chicago, Dallas-Fort Worth
-- will be protected," the trader said. "But no one's exempt."