United Flying Less to Japan

The largest U.S. airline United Continental Holdings Inc. (UAL - Analyst Report) is cutting its flights to and from Japan due to a slowdown in air travel demand in that country. Air traffic has weakened considerably in Japan following the March 11 massive earthquake and tsunami.

The carrier is expected to cut 10% of its Japanese capacity in April and 14% in May. United will trim its flights between Tokyo and U.S. cities like New Jersey, Los Angeles, Seattle and Washington.

Earlier in the month, United had said that it would reduce its capacity by approximately 1% in May and 4% by September. Additionally, the company also announced plans to scrap its unprofitable routes and less fuel-efficient aircrafts from its fleet.

United Continental’s plan to cut capacity is similar to its rivals Delta Air Lines Inc. (DAL - Analyst Report) and American Airlines, a wholly owned subsidiary of AMR Corporation (AMR).

Delta Air Lines will cut capacity by 15% to 20% through May, suspend services to Haneda airport and pull back on capacity between Narita and the beaches. American Airlines suspended two of its six daily flights to Japan between April 6 and April 25.

Though we expect Japan capacity cuts to be temporary, these would hurt the profitability of the U.S. airlines. In addition, rising fuel prices have surfaced as a major headwind to the airlines industry. Companies are struggling hard to deal with increasing costs either by flying less or charging more.

Notably, United expects its fiscal 2011 capacity to remain flat with the 2010 level. The company estimates 2011 international capacity will increase 2.5% to 3.5% while domestic capacity will decrease 1.5% to 2.5% year over year.

The Zacks Consensus Estimate projects a net loss of 30 cents per share for the first quarter compared with a loss of 55 cents in the year-ago quarter. However, the magnitude of the loss was increased in the last 30 days and 60 days from 24 cents and 21 cents, respectively.

We believe the U.S. carriers are combating rising fuel prices with increasing fares. United raised its fares by $10 per round trip on most U.S. flights while Delta responded with fare hikes of $6 to $14 per round trip.

We are currently maintaining our long-term Neutral recommendation on United Continental with the Zacks #3 (Hold) Rank.

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