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  • Capacity control could drive US airline profit gains in 2012: Raymond James

Capacity control could drive US airline profit gains in 2012: Raymond James

US legacy carriers could be historically profitable this year due to an ongoing strategic shift in network strategy, a Raymond James analyst said in a new report.

Although air travel demand is rising, fuel prices are keeping the industry's four legacy carriers - American Airlines, Delta Air Lines, United-Continental and US Airways - from boosting capacity, analyst James Parker wrote in the Global Airline Outlook 2012, which was published privately on 31 January.

"This demonstrates a shift in focus from market share to profitability," he said.

If the trend continues, airlines may be able to report better earnings this year than in 2010, the peak since the 2008 financial crisis, said Parker.

It would also represent a break from historical trends, he added. Airline earnings typically declined during recoveries because the companies re-emphasized capacity growth, which reduced load factors and hampered profits.

Meanwhile, Parker has adopted a neutral outlook on the implications of AMR Corp.'s reorganization through Chapter 11 bankruptcy.

The restructuring will not create any "big winners or losers," said Parker.

Ultra-low-cost carriers, such as Spirit and Allegiant, could benefit if American slashes its least profitable routes, he said. American also is likely to remove McDonnell Douglas MD-80s, which could reduce the carrier's Latin American capacity and create new opportunities for JetBlue and Spirit in the region, said Parker.

For American, the restructuring could eliminate the carrier's cost disadvantage compared to several post-bankruptcy rivals, such as US Airways, Delta and United-Continental.

Parker has calculated that the five major US airline bankrupticies since 2002 allowed the carriers to close their cost gap compared to the industry average by 7 percentage points.

American Airlines now has the highest seat-mile costs among US carriers at 14.6 cents, which is 18% higher than the industry average of 12.3 cents. If American's reorganization achieves the 7 percentage point reduction, the carrier's seat mile costs would decline to about 13.3 cents. That would make the carrier more efficient than its legacy peers, but still more expensive than low-cost and hybrid carriers, such as Southwest Airlines and Alaska Airlines, respectively.

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