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"Hard-pressed airlines move to cut capacity" By Pilita Clark, Aerospace Correspondent. Published: May 2 2011 17:02 I Last updated: May 2 2011 17:55

Air passengers face the unhappy prospect of higher fares and crowded aircrafts as airlines around the world try to fend off the impact of rising fuel prices and other uncertainties. As many carriers report their first results for the year, a clearer picture is emerging of the financial toll of jet fuel prices soaring to more than $3.30 a gallon - 45 per cent more than a year ago. In the US, all but one of the five leading airlines have posted a first-quarter loss. The exception was the Dallas-based budget airline Southwest, though it suffered a 55 per cent drop in year-on-year profit as a result of high fuel prices. Richard Anderson, Delta Air Lines chief executive, warned last week that high fuel prices were "the new norm for the industry". Delta, the second-biggest US airline by traffic, posted a $318m net loss for the March quarter. More weak sets of results are expected in Europe in the coming weeks as the region's six largest airline groups report their financial performances amid Middle East unrest that has pushed up oil prices.

In Asia, meanwhile, carriers are grappling with rising fuel costs and the effects of natural disasters that hit Japan, Australia and New Zealand in the space of three months.

Japan's All Nippon Airways last week reported a quarterly net loss of Y14bn ($172.7m) and said the effect of the March 11 earthquake and tsunami, plus the increase in oil prices and uncertainty about the global economy, meant it was delaying its profit forecasts for the financial year ending March 2012.

Yet, even though oil prices have jumped to levels last seen in 2008, with airline share prices plunging, economic conditions today are far more favorable and the industry is in much better shape.

Critically, demand has been strong enough for airlines to raise fares repeatedly this year, especially for the all important business-class passengers. "So far, airlines have been able to pass through a very large portion of fuel price increases [to passengers]," says
Ray Neidl, senior aerospace specialist at Maxim Group in New York. The question is how long this can continue. "The big worry is that eventually the higher fuel prices will curtail the global economic recovery," he says. "That's [airlines'] greatest fear."

Given the prospect of faltering demand, many carriers, especially in the US, are scaling back seats. "They have no choice. They can't really handle $3-plus per gallon jet fuel," says Helane Becker, aviation analyst at Dahlman Rose, a US investment bank. ''The bottom line is that in order to be profitable they have to reduce capacity."

These reductions mean that if oil prices start to fall, the industry should be in a strong position to reap the benefits. But pessimism is evident: the latest quarterly survey of airline business confidence by the International Air Transport Association, the industry body, reports a "significant deterioration" in profit expectations for 2011.

"The bulk of respondents now expect the level of profitability to fall this year, driven largely by a significant increase in fuel costs," lata says, Airlines' differing ability to cope with rising fuel prices is already evident at Europe's International Airlines Group, parent of newly-merged British Airways and Spain's Iberia.

BA has raised fares three times in less than four months thanks to a strong recovery in demand for its high yielding business-class seats.
But as Deutsche Bank analyst Geoff van Klaveren points out, Iberia has not been able to follow suit. This is partly because it increased capacity on its long-haul routes to Latin America, he says, and also because it faces stiff competition in its home market from Ireland's Ryanair, Europe's largest budget airline.

"I think the US airlines have done a great job of being very reactive on fuel and immediately scaling capacity back," says Mr van Klaveren, adding that he Is worried about what lies ahead in Europe if fuel costs continue to rise.

"Fuel costs are already higher now than the average through the whole of 2008, so if things stay as they are, airlines will have to cut capacity on routes that cannot support higher pricing."

Additional Information-

The article from economics and it is deals with the price elasticity of demand and supply in the airline industry. Due to very high fixed costs, it is very difficult for a corporation to enter and exit the airline industry. Other aspects affecting air travel is the demand for air travel. These aspects including the price elasticity of demand and supply of air travel have been discussed in the answer.

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