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US Airlines Stung By Biz Travel Drop; More Cuts Coming

July 25, 2009 | Chris Payatagool

bust.jpgSteep declines in business travel amid the economic downturn are taking a heavy toll on U.S. airlines, offsetting the benefits of lower fuel prices and forcing them to take fresh steps to control costs and boost revenue.

Southwest Airlines Co. (LUV), Continental Airlines Inc. (CAL) and UAL Corp. ( UAUA) on Tuesday cited cutbacks in corporate travel as key factors weighing on their results in the second quarter and their outlooks for the remainder of the year. Continental announced plans to cut 4.2% of its work force, while UAL said it would further slash international capacity.

The results are the latest to show the debilitating impact of declining demand, which has forced airlines to streamline their operations and implement new fees over the past year. Last week, American Airlines parent AMR Corp. (AMR) posted a big second-quarter loss. Delta Air Lines Inc. (DAL) and US Airways Group Inc. (LCC) are expected to announce losses when they report later this week.

"Demand for business travel remains weak, and we continue to stimulate traffic with more discounted and promotional fares," Southwest Chief Executive Gary Kelly said in a release, calling this "one of the worst operating environments for the airlines, ever." He said that the company will continue implementing cost controls, but can't predict a profitable third quarter owing to the challenging operating climate.

Southwest, a discount carrier that has been beefing up its services for business travelers in recent years, saw its second-quarter income fall 83% to $ 54 million, or 7 cents a share. Revenue fell 8.8% to $2.62 billion, and the company was hurt by reduced benefits from its long-standing fuel hedging program as prices declined.

Southwest, which ended a streak of three consecutive quarters of losses, isn't affected by the downturn in the same way as its peers since it doesn't fly internationally.

UAL, parent of United Airlines, said it has seen some strength for peak summer travel, but revenue still declined 25% to $4.02 billion. The Chicago company said that revenue was hit by the decline in business and premium traffic, particularly internationally. International passenger revenue per available seat mile was down 25.9% versus a year ago, compared with a domestic decline of 12.5% .

UAL, which announced it will cut international capacity by another 7% for the last four months of the year, benefited from gains related to its fuel-hedging program in the second quarter, absent which it wouldn't have been profitable.

Income in the period was $28 million, or 19 cents a share, compared with a $ 2.74 billion loss a year earlier. Without the gain, UAL posted a loss of $2.23 a share, better than analysts had expected.

At Continental, the loss in the second quarter widened to $213 million, or $ 1.72 a share, compared with a year-earlier loss of $5 million. Excluding items such as charges on the lowered value of its retired aircraft, the loss in the latest period was $1.36. Revenue fell 23% to $3.13 billion.

CEO Larry Kellner had said last month the falloff in corporate travel was stabilizing. But Tuesday, the company said its results were hurt by "significant declines" in high-yield traffic, as many business travelers cut back.

In response, Continental is cutting an additional 1,700 jobs, including management and clerical staff. The cuts are on top of a previously announced reduction of 500 reservation-agent positions. The company has also recently offered leaves of absence to 700 flight attendants.

Continental also said Tuesday it would increase domestic checked-baggage fees by $5 for customers who don't prepay the fees online. It will also boost the telephone-reservation booking service fee by $5.

Continental shares were down 5.3% to $9.63 and Southwest shares were off 5.2% to $6.91 in recent trading. UAL shares advanced 8.3% to $3.80.

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