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U.S. airlines cut capacity to battle high fuel costs

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Major U.S. airlines announced further 2011 capacity cutbacks to cope with the dramatic rise in fuel prices, and Delta Air Lines Inc. (DAL-N) said higher oil and the effects of the Japanese earthquake will hurt earnings in the current quarter.

"We're not anticipating any significant moderation" from current high fuel price levels, Delta President Edward Bastian told a JPMorgan investor conference Tuesday.

Carriers have steadily boosted fares this year as $100-a-barrel US oil threatens to wipe out the industry's recovery from the 2008 and 2009 economic downturn. Airlines are reporting higher demand, but costs are also rising.

Oil prices eased Tuesday on an expected slowdown in Western air strikes on Libya. But NYMEX crude (CL-FT), which is directly tied to jet fuel prices, was up nearly 1 percent at $103.32 in late morning trading.

Delta currently estimates its fuel bill will rise about $3 billion for this year. That will result in a hit to first-quarter earnings. Bastian said the airline expects an operating margin of negative 2 to 3 percent for the period.

On Tuesday, airlines disclosed more plans to reduce flying in the face of uncontrollable jet fuel costs.

US Airways Group Inc. (LCC-N) said its fourth-quarter system capacity would be down as much as 2 percent from previously expected levels, and Delta said it would scale back capacity both internationally and in the United States in the second half.

Low-cost domestic carrier Southwest Airlines Co. (LUV-N) said its capacity plans for this year have not changed, but Chief Executive Gary Kelly said higher oil had forced the discount carrier to raise ticket prices.

Delta said many of its capacity actions were focused on the trans-Atlantic market, where revenue was falling short and costs were rising. Though better revenues were expected in that region starting in the spring, capacity will drop markedly in the fourth quarter.

Lost revenue from effects of the March 11 Japanese earthquake will also pressure results in the short term, airlines said.

AMR Corp.'s American Airlines (AMR-N) cited a "modest decline" in revenue from Japan.

And Delta, which operates more flights to Japan than any other U.S. carrier and generates a bit over $2 billion a year from the Tokyo market, estimated the business impact of the Japanese earthquake, tsunami and their aftermath could range from $250 million to $450 million. It is cutting capacity to Japan by 15 percent to 20 percent through May.

"Over the next 2 to 3 months we will undoubtedly see some fairly significant drop-off in demand and drop-off in bookings" tied to Japan, Bastian said.

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