Airline Executives Mixed on 2010 Prospects

Dec. 13--Airlines came into 2009 hopeful that with fuel prices dropping, it would be a profitable year.

It wasn't.

And 2010, depending on which airline executive is talking, might only be slightly better.

Some domestic carriers like Delta Air Lines and Fort Worth-based American Airlines see demand for business and premium travel starting to rebound.

Southwest Airlines Chief Executive Gary Kelly, however, is not so sure that business travel has come back.

But one thing is certain for the airline industry next year: There will be fewer flights.

Capacity cuts will continue in 2010 as airlines try to figure out which flights are the most lucrative.

All carriers aim to return to profitability next year.

"There have been modest improvements," airline expert Darryl Jenkins said. "But the airlines haven't pulled out enough capacity."

American Airlines, owned by AMR Corp., hopes that it can turn a profit.

In the first nine months of 2009, the company reported $1.1 billion in losses.

"We're focused on returning our airline to profitability," said Beverly Goulet, AMR's vice president of corporate development and treasurer. "We are managing capacity prudently while at the same time strengthening our network."

American plans to alter its network next summer by reducing flights at St. Louis and at Raleigh/Durham, N.C., while increasing the number of flights to its hubs in Chicago and Dallas/Fort Worth.

And it also plans to add international service to Beijing and reinstate flights to El Salvador as the carrier sees an increase in travel demand.

"We are seeing improvement in both leisure and premium traffic at this point," said Goulet, adding that advance bookings through February for international travel are up 3 percentage points. "While the domestic markets have appeared to recover at a slightly faster pace than the international markets, we're starting to see some improvement in those markets as well."

Crucial to American's international strategy are two important decisions that the airline had hoped would be made by year's end.

Instead, it looks as if American will have to wait until 2010 before the U.S. Transportation Department rules on its antitrust immunity application with British Airways and Iberia and before the Japanese government decides whether American or Delta will be allowed to invest in Japan Airlines.

JAL is now part of American's Oneworld alliance, but Delta has tried to woo JAL to become part of its SkyTeam group.

If American doesn't keep JAL, "their alliance is severely marginalized," Jenkins said.

"It is very much in their long-term interest to maintain the JAL relationship."

The one thing that may not be resolved for American in 2010 is its labor contracts.

The company has been in mediated talks with unions representing its pilots, flight attendants and ground workers.

Michael Derchin, an analyst with FTN Equity Capital Markets, said he doesn't see any resolution in those labor talks until 2011 at the earliest.

While several airline executives at an industry conference last week expressed confidence that business travel was returning and will pick up in 2010, Southwest's chief executive was not one of them.

"I'm not expecting strong economic growth in 2010, and likewise I'm not expecting a rebound in business travel in 2010. And we want to plan for 2010 accordingly," Kelly said.

The Dallas-based carrier has several initiatives scheduled for next year.

Kelly said he is hopeful that they will bring additional revenue to Southwest.

Although Kelly said capacity will be flat next year, the company does plan to boost flights to St. Louis and add Panama City, Fla., to its network.

The carrier's international code-sharing plans with Canada's WestJet and Mexico's Volaris will also begin in 2010.

It also plans to integrate new technology into its Web site, Southwest.com.

It will also create "ancillary revenues" for Southwest, like the $10 Early Bird Check-In fee that the airline began offering on its Web site this fall.

"We are raising fares," Kelly said. "We're just trying to do that in a positive way."

The company also plans to relaunch its RapidRewards frequent-flier program in late 2010, a move Kelly said could generate additional revenue for Southwest while giving loyal customers more reward opportunities.

Southwest "is benefiting from both leisure and business consumers seeking the best travel value proposition which [Southwest] clearly offers with its bags fly free plan," Derchin wrote in a research note to investors last week.

Most airline executives are cautiously optimistic that 2010 will be a better year for the industry.

"The good news is that there are signs of recovery on the horizon," said United Airlines Chief Financial Officer Kathryn Mikells, adding that the Chicago-based carrier has seen an increase in corporate revenue and bookings since May.

Atlanta-based Delta will finish repainting all of merger partner Northwest Airlines' planes by April and expects revenue to become positive by midyear.

"I anticipate demand to remain strong," Delta Chief Financial Officer Hank Halter said. "There is not a lacking of demand in terms of willingness to travel."

Higher fares for peak travel days are also helping the industry, US Airways President Scott Kirby said.

Kirby said that November was the first month corporate travel was up compared with the same period last year and that US Airways' business traffic markets such as the Boston-Washington shuttle have recovered the fastest.

"I think this is very indicative of a corporate demand recovery," Kirby said at the Next Generation Equity Research Airline Conference.

While industry analysts expect airlines' financials to improve in 2010, it's only because 2009 was so terrible.

"I don't think they'll lose the massive amounts of money they did this year," Jenkins said. "There will still be fewer flights and the flights will be full of people."

This report includes material from The Associated Press.

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