In an effort to staunch the financial bleeding, executives at carriers like Northwest Airlines <NWA.N> and Delta Air Lines <DAL.N> are looking at unprofitable routes to cut.
WASHINGTON (Reuters) - Major U.S. airlines are beginning to shrink their operations as they battle unrelenting increases in fuel prices, a weakening economy and a sharp decline in their share prices.
In an effort to staunch the financial bleeding, executives at carriers like Northwest Airlines <NWA.N> and Delta Air Lines <DAL.N> are looking at unprofitable routes to cut.
"The world they knew has vaporized," said consultant Mike Boyd of spiraling industry finances and how chief executives plan to deal with it.
The steps carriers will take to manage what some industry experts see as the next airline downturn are expected to feature on Tuesday at a JP Morgan aviation conference. "They are going to get questions on this," said Boyd.
!ADVERTISEMENT!A sense of where airlines are heading has emerged in recent days.
Northwest Airlines <NWA.N>, which slashed operations in bankruptcy, may shrink the airline even more if fuel prices erode travel demand, the carrier's chief executive said.
In a recorded message to employees on Sunday, Doug Steenland did not specify what steps Northwest might take or how much smaller the airline might get, but he cautioned that higher fuel costs can lead to fewer passengers.
"With that in mind, we have to rethink the size of the airline we operate," he said.
Oil prices, directly related to jet fuel costs, notched a record high of $111.80 in New York on Monday before slipping to near $105 in afternoon trade.
Although Northwest and other airlines have reported operating more flights and fuller planes at higher fares, Steenland said the industry "as a whole" appears headed back into some "very tough times."
US Airways Group Inc <LCC.N> chief executive Doug Parker said last month that the industry was "a mess."
Airlines are looking closely at regional jet operations -- especially the smallest jets that more and more carriers are flying at a loss. Delta Air Lines <DAL.N> has cut some of these flights where operations are limited and may chop again.
"We'll make reductions when necessary," Delta chief executive Richard Anderson said in a similar message to employees. "We're going to manage prudently through this spike in fuel prices."
The fuel price spike coupled with a steadily weakening U.S. economy has stalled the industry's modest recovery from the 2001-06 downturn. As a result, airlines have been pummeled on Wall Street with steep declines in their share prices.
Northwest shares, which have lost two thirds of their value since the company emerged from bankruptcy in May, fell 6.2 percent on Monday to $8.92.
Delta shares, which have lost more than half their value since emerging from bankruptcy last April, traded down 3.9 percent to $9.23 on Monday.
United Airlines, a unit of UAL Corp <UAUA.O> fell 7.8 percent; US Airways fell 10.1 percent; American Airlines, a unit of AMR Corp <AMR.N>, fell 3.2 percent and Southwest Airlines <LUV.N> ended just 0.6 percent lower.
The previous downturn resulted in bankruptcies and unprecedented out-of-court restructurings. Carriers appear leaner and in better shape this time to weather the oncoming turbulence, experts say.
For example, Northwest, Delta, United and US Airways, while in bankruptcy, dumped many older, inefficient planes and reworked lease agreements for aircraft they are flying now. Their labor expenses are lower, as are a host of other operating costs.
"We need to find ways to preserve cash by reducing capital expenses and operating costs. Fortunately, we have over $3 billion of cash on hand," Steenland told employees.
Other carriers also have healthy cash balances for now. United ended 2007, according to its most recent available regulatory filing, with unrestricted cash and short-term investments of $3.6 billion.
American had $5 billion in cash and short-term investments, including a restricted balance of $428 million.
Delta ended the year with $3.8 billion in unrestricted liquidity, including $1 billion in revolving credit.
Southwest, the biggest airline by market capitalization at $8.5 billion, reported $2.8 billion in cash and short-term investments. The company also had an unsecured revolving credit line of $600 million.
(Reporting by John Crawley and Kyle Peterson; Editing by Tim Dobbyn)
