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.
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
On the other hand, Southwest Airlines
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.
Fool contributor Shubh Datta does not own shares of any of the companies mentioned in this article. Southwest Airlines is a Motley Fool Stock Advisor recommendation. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.