As a gateway to Asia and a vital link in global air transport, Japan ranks among the most important hubs for certain U.S. airlines. However, the Japanese crisis appears to have 'broken' that link, exposing the airline industry's vulnerability even as it grapples with abnormally high oil prices.
A bumpy ride
Airlines have suffered rotten luck this year. First, January's severe winter storms grounded traffic and hampered travel. Then protests in the Middle East sent oil prices soaring above $100 a barrel. Now, with the threat of radiation looming large over Japanese skies, traffic to one of the biggest and most profitable markets has dwindled badly.
The March 11 tsunami and earthquake has disrupted air traffic all over Japan. Some U.S. airlines have cancelled their flights to and from the country. Tokyo's Narita Airport, the main international gateway in and out of Japan, has closed, while Sendai Airport remains flooded. However, Japan's busiest airport, Haneda, has reopened following the quake.
Delta Airlines (NYSE: DAL), which generates nearly 8% of its revenue from Japan, has cancelled nearly half of its daily flights in and out of the country following the quake. Since Delta has the most flights to Japan of any U.S. airline, the airline says the reduction in service to Japan could result in $250 million to $400 million in losses. US Airways Group (NYSE: LCC) has followed suit, announcing that it will reduce the number of flights to Japan. But American Airlines (NYSE: AMR) said it would maintain its existing schedule; in fact, it's planning a long term joint-venture with Japan Airlines to increase operations on Pacific routes.
Redirected route
Just as the industry emerged from the recession, rising oil prices and Middle East tensions forced airlines to raise ticket prices and increase overall capacity. Nonetheless, higher costs have still outstripped any revenue increases. To cope, airlines had planned to increase capacity in the second half of the year, but fewer flights to Japan may force them to decrease that factor instead.
At a recent JPMorgan Chase conference, Beverly Goulet of American Airlines said that the company was monitoring the current situation and would reduce capacity if it needs to. United Airlines (NYSE: UAL), which is merging with Continental, said that higher fuel costs would force it to reduce the overall number of seats it flies this year. The airline also announced plans to remove some of its less-fuel efficient planes from its hangars. United said it expects growth in the rest of the year to fall, after a rise of around 2% at the start of the year. The airline will also cut domestic capacity by almost 5% by the end of the fourth quarter, likely crimping its profit margins.
On the other hand, Southwest Airlines (NYSE: LUV), which generally ignores fare changes and is obviously domestically focused, has planned to up its capacity by up to 6% after gaining considerably from increasing ticket costs. Additionally, JetBlue (Nasdaq: JBLU) managed to shrug off rising oil prices and increase traffic by 9% for the month of February. This just goes to show that although significant difficulties do exist, carriers can still find ways to grow their businesses
Delta had initially planned to increase overall capacity by 2% in the second half of the year, including a 13% increase in the Pacific sector. Instead, after the Japanese crisis, the airline instead plans to reduce its capacity by 2%. Delta has since lowered its planned increase in the Pacific sector to 5% from 13%. This doesn't augur well for the company's revenue and profit margins.
The Foolish bottom line
To me, it seems like diminished capacity and fewer flights will force U.S. airlines into a slight descent over the next few quarters. Still, I believe that if and when the Japanese economy stabilizes, the airline industry will have a reason to cheer after a crisis-filled year. With any luck, the typically busy summer will probably prove fruitful, but the predicted capacity cuts don't bode well. We'll have to wait and see.
