U.S. airlines cut capacity to battle high fuel

ATLANTA/CHICAGO (Reuters) - Major U.S. airlines announced further 2011 capacity cutbacks to cope with the dramatic increase in fuel prices, with Delta Air Lines Inc also blaming the earthquake in Japan for a hit to earnings in the current quarter.

US Airways Group Inc said it would reduce flying this year, joining United Continental Holdings and other carriers that have already outlined capacity curbs.

"It's not the absolute raw price of fuel that is the most concerning that we face as an industry," Delta President Edward Bastian told a J.P. Morgan investor conference on Tuesday. "It's the sharp rise with fuel."

Carriers have steadily boosted fares this year as $100-a-barrel oil threatens to wipe out the industry's recovery from the 2008 and 2009 economic downturn. While higher travel demand is boosting airlines' unit revenue, costs are also rising.

Oil prices moved up on Tuesday in the wake of more Mideast unrest. NYMEX crude, which is directly tied to jet fuel prices, was up 1.2 percent at $103.55 in afternoon trading.

"While capacity restraint should help, the key to overcoming higher fuel costs is to increase revenue," said Beverly Goulet, vice president of corporate development for American Airlines parent AMR Corp .

Delta currently estimates its fuel bill will rise about $3 billion for this year. That would result in a hit to first-quarter earnings. Bastian said the airline expects an operating margin of negative 2 to 3 percent for the period.

US Airways said its fourth-quarter system capacity would be down as much as 2 percent from previously expected levels, and Delta said it would scale back capacity both internationally and in the United States in the second half.

Domestic carrier Southwest Airlines Co said its capacity plans for this year have not changed, but Chief Executive Gary Kelly said higher oil had forced the low-cost airline to raise ticket prices.

Delta said many of its capacity actions were focused on the transatlantic market, where softer revenue was not making up for rising fuel. Though better revenues were expected in Europe starting in the spring, capacity will drop markedly in the fourth quarter.

Lost revenue from effects of the March 11 Japan earthquake will also pressure results in the short term, airlines said.

AMR cited a "modest decline" in revenue from Japan.

Delta, which operates more flights to Japan than any other U.S. carrier and generates a bit over $2 billion a year from the Tokyo market, estimated the business impact of the earthquake, tsunami and their aftermath could range from $250 million to $400 million. It is cutting capacity to Japan by 15 percent to 20 percent through May.

"Over the next 2 to 3 months we will undoubtedly see some fairly significant drop-off in demand and drop-off in bookings" tied to Japan, Bastian said.

U.S. airline shares were mostly lower in afternoon trading. The Arca Airline index <.XAL> was down 1.2 percent. AMR fell 3.2 percent to $6.56, Delta was down 1.9 percent at $9.98 and industry leader United Continental Holdings Inc was off 2.4 percent at $23.40.

(Reporting by Karen Jacobs and Kyle Peterson, editing by Gerald E. McCormick)