`New Bad Boy' JetBlue Adds Seats in Test of Airlines' Resolve

JetBlue Airways Corp., Alaska Air Group Inc. and AirTran Holdings Inc. are testing the industry’s resolve to curb available seats as they add new jets and fly planes more often.

After U.S. carriers returned to profits this year by limiting seats, investors need to see whether airlines’ expansion this quarter and in 2011 will imperil the recovery, seven analysts said in reports and interviews. When the supply of seats exceeds demand, carriers cut fares to fill them.

The two largest U.S. carriers, United Continental Holdings Inc. and Delta Air Lines Inc., plan to hold their 2011 seating increases to 3 percent or less. JetBlue, less than a fifth the size of those rivals, plans to take nine new jets next year after boosting capacity about 10 percent this quarter.

“JetBlue is kind of the new bad boy,” Ray Neidl, an analyst at Maxim Group LLC in New York, said in an interview. “They want to grab market share and, hopefully, it doesn’t become infectious to the rest of the industry.”

Maintaining capacity cuts put in place since 2008 as demand rises has helped carriers produce back-to-back quarterly profits for the first time in three years. A fourth-quarter profit would be the first in a decade, said Michael Derchin, a CRT Capital Group LLC analyst based in Stamford, Connecticut.

Photographer: George Frey/Bloomberg

Delta Air Lines Inc. plan to hold their 2011 seating increases to 3 percent or less while JetBlue plans to take nine new jets next year after boosting capacity about 10 percent this quarter. Close

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Photographer: George Frey/Bloomberg

Delta Air Lines Inc. plan to hold their 2011 seating increases to 3 percent or less while JetBlue plans to take nine new jets next year after boosting capacity about 10 percent this quarter.

Airlines measure capacity by multiplying the number of seats on their planes by the distance flown. New York-based JetBlue, which hasn’t detailed how much its available seating will grow in 2011, is adding the new jets to a fleet that it said will total 161 Airbus SAS and Embraer aircraft by the end of 2010.

Alaska has said its gain will be as much as 9 percent, and AirTran may expand by 4 percent as it prepares to be acquired by Southwest Airlines Co.

‘Bear Watching’

“While each plan is well-thought-out and makes strategic sense for each carrier, we feel these moves bear watching, including competitive responses getting out of hand,” Derchin said in an Oct. 22 note to investors. He advises buying JetBlue and holding AirTran and Seattle-based Alaska.

Flights in Boston and the Caribbean will be a focus for JetBlue again in 2011, Chief Financial Officer Edward Barnes told analysts on an Oct. 21 conference call. “We are not seeing any evidence of a slowdown in demand,” he said.

JetBlue, Alaska and Orlando, Florida-based AirTran fly chiefly in the U.S. and together generate about as much annual traffic as the domestic operations of AMR Corp.’s American Airlines, the third-largest U.S. carrier.

United Continental, Atlanta-based Delta and American probably will show restraint and abide by their forecasts for adding seats next year, said Jeff Straebler, a fixed-income strategist at RBS Securities Inc. in Stamford, Connecticut.

‘Forced’ Discipline

“In the past the response would have been, ‘We’re making money. Get the planes in the air,’” Straebler said in an interview. “This time, discipline has been forced on them by their weak balance sheets, and they now know it works.”

Ending losses has helped buoy shares, with the Bloomberg U.S. Airlines Index surging 30 percent this year before today to the highest level since March 2008. US Airways Group Inc. and United Continental, the new parent of United and Continental airlines after their Oct. 1 merger, have more than doubled.

The seat-growth plans “are prompting shareholders to question whether the revenue recovery now under way is sustainable,” Dan McKenzie, a Hudson Securities analyst in Chicago, said in an Oct. 25 note. “Investors are right to worry, but capacity concerns rank as a backburner worry for us.”

Airlines began paring seats after jet fuel reached a record $4.36 a gallon in 2008 and the recession damped business travel. Planes were parked or returned to leasing companies and some orders were deferred. Now, as travel revives, there is more incentive to add seats, said Jay Sorensen, president of aviation consultant Ideaworks in Shorewood, Wisconsin.

‘Invitation for Others’

“The best predictor of future behavior is past behavior,” he said in an interview. “When someone starts growing, it’s almost an invitation for others to follow the same path.”

Southwest plans to increase capacity 8 percent in 2011’s first quarter and 5 percent in the second by flying planes more frequently, taking advantage of demand outpacing its forecast, Chief Executive Officer Gary Kelly said on Oct. 21. Dallas-based Southwest, which has grown as much as 10 percent annually in the past, hasn’t given a capacity outlook for next year.

AirTran will add six new planes next year, CEO Bob Fornaro said in an Oct. 22 interview. Alaska’s capacity additions will meet demand and be profitable, and won’t damage industry efforts to keep seat growth in check, President Brad Tilden said.

Overseas Flights

The largest carriers primarily are adding back capacity in international markets, where demand remains strong, fares are up and competition isn’t as intense, said Matthew Jacob, a Majestic Research LLC analyst in New York.

United Continental, based in Chicago, said it will increase capacity as much as 2 percent in 2011, while Delta projected expanding as much as 3 percent. Fort Worth, Texas-based American said it will raise capacity 3.5 percent.

Overseas flights will drive the 2 percent capacity growth at Tempe, Arizona-based US Airways, the carrier said last week.

The risk for investors may be that airlines have “tapped out” in their hunt for revenue by filling their available seats and raising fares, spurring them to expand again, Jacob said in an interview.

“We may see a return to more aggressive capacity additions,” Jacob said. “That’s when the airline industry has traditionally gotten into trouble.”

To contact the reporter on this story: Mary Schlangenstein in Dallas at maryc.s@bloomberg.net; Mary Jane Credeur in Atlanta at mcredeur@bloomberg.net

To contact the editor responsible for this story: Ed Dufner at edufner@bloomberg.net

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