SARS Outbreak Yet Another Headache for Embattled U.S. Airlines

U.S. airlines with extensive routes in Asia could face yet another hurdle with the SARS pneumonia outbreak if the disease causes travelers -- already on edge because of the Iraq war -- to avoid air travel, analysts said Wednesday.

The risk is greatest for UAL Corp. (UAL)'s United Airlines and Northwest Airlines Corp. (NWAC), analysts said, because they are the U.S. carriers with the largest exposure in Asia, where most cases of SARS, or Severe Acute Respiratory Syndrome, have been found. United derives about one-fifth of its revenue from Asian routes, while Northwest generates roughly a quarter of its revenue from the region.

But analysts said the outbreak of SARS could be a limited blow to many other U.S. carriers, particularly if the disease remains outside the continental United States.

The World Health Organization urged travelers Wednesday to avoid Hong Kong and China's southern Guangdong province because of the rising number of SARS cases. The disease has killed nearly 80 people and infected more than 2,200 in parts of Asia, Europe and North America.

"It's a concern primarily for United and Northwest among the U.S. carriers because of their extensive Pacific route authority," said Ray Neidl, airline analyst at Blaylock & Partners. "But right now traffic is off already because of the war, so it's hard to determine if it's going to prevent a recovery after the war's over or how long the recovery will take in the Pacific."

U.S. airlines, already struggling with the weakest demand for air travel in decades, are under renewed pressure because the Iraq war has taken another toll on travel.

Credit Suisse First Boston said Wednesday it cut Northwest Airlines to "neutral" from "outperform" on concerns that SARS would affect demand for travel to and from the Pacific region.

A false alarm spooked U.S. travelers on Tuesday when an American Airlines jet was quarantined in California because five people on board complained of symptoms. No one on board turned out to have SARS, and there have been no deaths as of yet related to SARS in the United States.

Many U.S. carriers, which have already put flexible ticket policies in place due to the Iraq war, said those policies would also apply to passengers who change plans due to SARS.

United said Wednesday it would allow passengers to make changes to tickets to, from and through certain Asian cities because of SARS. The relaxed ticket policies affect travel to Beijing, Shanghai, Hong Kong, Singapore and Vietnam.

United said passengers who purchase tickets on or before April 15 for travel on or before May 31 may postpone travel without penalty as long as travel is completed by the end of the year.

Northwest said passengers traveling within certain parts of Asia who may be denied travel due to medical reasons will be able to change travel plans without any fees.

Jamie Baker, airline analyst at J.P. Morgan, estimated that load factors at United and Northwest, which measure the percentage of seats filled on planes, have declined by as much as 20 points in the last week, considered a substantial drop.

"Load factors have been on the decline in Asia since the start of the war, though they seem to have taken an even greater hit in the past week," he said.

"SARS stands to disrupt the all-important Golden Week in Japan, which usually constitutes the very peak of peak leisure demand," Baker added, referring to the Japanese holiday week in May. "(But) at this juncture, we would not expect SARS to deliver nearly the debilitating blow that the (Iraq) war thus far has."

With the war in Iraq already denting traffic, it is difficult to determine how much of the traffic decline is due to the war and how much is related to SARS, analysts said.

"Certainly (SARS) is of concern to travelers," Sam Gilliland, chief executive of online travel agency Travelocity, told CNBC. "We do expect to see a dip in travel bookings due to that. There will definitely be an impact."

For at least one European carrier, SARS has already hurt ticket sales.

The chief executive of Dutch airline KLM, which announced drastic cost savings on Tuesday amid falling bookings, said on Wednesday the effect of the SARS disease on KLM's business was worse than the impact of the Iraq war. CEO Leo van Wijk said the drop in bookings for flights to Asia was "really dramatic" and added overall March traffic was down about 9 percent on the previous year.