U.S. Carriers' Shift to Int'l Flights Raises Concern

Published October 21, 2005

| Reuters

U.S. airlines are increasingly shifting flights from highly competitive domestic routes to international destinations, but some observers are worried their rush to do so could create a glut, driving fares lower.

That would be good news for passengers, but yet another blow to the major U.S. carriers, which are struggling with soaring fuel prices and competition from low cost rivals.

"I would be disingenuous if I said I wasn't concerned," said American Airlines Chief Executive Gerard Arpey in an analyst conference call this week. "I think the capacity additions I've read about may not necessarily prove profitable for those that are entering those markets."

Despite those concerns, AMR Corp.'s (AMR) American, like Delta Air Lines Inc. (search) , Continental Airlines Inc. (CAL) and UAL Corp.'s United Airlines Inc. (search), is planning to boost international capacity next year, betting its new destinations -- such as Shanghai and New Delhi -- will be money makers.

"Markets that don't work we're going to step away from," Arpey said, pointing to the top U.S. airline's recent decision to end service from Chicago's O'Hare to Nagoya, Japan.

Still, the possibility of a glut of seats to foreign destinations remains a concern for the industry, analysts say.

"They do inherently become less profitable with more competition that floods in there," said Morningstar analyst Chris Lozier, adding that low-cost carriers, who have mostly shunned overseas routes, could eventually be another threat.

Leading the charge has been newly bankrupt Delta, No. 3 in the United States, which said Tuesday it would add 11 routes to Europe and the Middle East in 2006 in a bid to become the world's leading transatlantic airline.

"Our domestic network has excess capacity and our customers are asking for international flights and Delta believes it can make money flying internationally," said spokeswoman Chris Kelly. "It's an integral part of our transformation plan, our customers have asked for this, they want it, and they are buying tickets on these planes."

Continental Airlines has made its own overseas push a cornerstone of its effort to become consistently profitable as low cost airlines slash fares and traditional carriers, such as Delta and Northwest Airlines Corp., cut costs in bankruptcy.

Continental, the No. 5 U.S. airline said 47 percent of its capacity was deployed internationally at the end of September, compared with 44 percent a year ago, excluding commuter flights.

Continental began flying from Houston to Cali, Colombia in July, will soon start flights from Newark, New Jersey, to New Delhi and has won approval to fly to Buenos Aires.

Continental told analysts this week that, next year, it expects to increase available seats only on international routes. It defended the move, saying it had unique strengths, including its Newark hub and 200-seat 757 jets it uses on routes that do not justify wide-body aircraft.

"We're pretty comfortable with our international growth strategy," Chief Executive Larry Kellner said. "Obviously as additional capacity comes in to some of those markets at the margin we're impacted by that."

Elsewhere in the industry, United began shifting capacity to international routes about a year ago as it sought to better compete as it reorganized under bankruptcy protection.

"We've been pleased with that decision," Jake Brace, chief financial officer at United, said on the sidelines of a bankruptcy hearing. "We are obviously mindful of other carriers following in our footsteps."

No. 4 U.S. airline Northwest has said it views its Pacific routes as one of its most valuable assets.

Discount carriers, such as Southwest Airlines Co. (LUV) in the United States and Ireland's Ryanair Holdings Plc (search) have shunned international routes because of worries they would complicate their business plans by requiring new aircraft types.

But the high end of the market has attracted two new competitors, Eos Airlines (search) and MAXjet Airways (search), which are both starting premium services between New York and London, threatening to lure away some of the highest paying passengers on that route.

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