US Airlines Trim Capacity - Aero Aftermarket Impact (LUV, JBLU, DAL, AAR, UAL, LCC, GR)

At least four US airlines have reduced their capacity plans for 2011 largely due to the high oil price.

Oil prices rose to its highest price in two weeks on escalation of crisis in Libya, which is one of the world's 10 richest oil-producing countries. Tensions in Libya raised concerns that oil exports from the African nation will remain disrupted.

Futures of West Texas Intermediate crude rose 75 cents to $106.50 a barrel and brent crude futures increased 2 cents to $115.57.

At a recent investor conference, Southwest Airlines (NYSE: LUV) and JetBlue (NASDAQ: JBLU) have confirmed their capacity growth plans at up 5 to 6 percent and 7 to 9 percent, respectively, but four other US airlines either reiterated or announced plans to reduce their capacity outlook.

1) Delta Airlines (NYSE: DAL) lowered its second half 2011 system available seat miles (ASMs), or capacity, from up 2 percent to down 2 percent, driven by 8 percent lower growth in the Pacific market partly reflecting impact from Japan

2) American Airlines (NYSE: AAR) lowered its full year consolidated capacity plan by 1 percent vs. the prior guidance of 4.3 percent growth, which called for 1% increase in domestic capacity and 7 percent higher long haul ASMs

3) US Airways (NYSE: LCC) reiterated full year capacity growth of 1.5 percent, which will be updated to reflect 1-2 percent lower growth in the fourth quarter 2011 capacity, and

4) United Continental (NYSE: UAL) now expects flat ASM in 2011 vs. prior 1.5 percent growth, and fourth quarter 2011 domestic capacity will be down 5 percent from last year.

We still feel comfortable with our forecast of about 5 percent of global ASM growth this year, driven primarily by Asian expansion, and increased long haul capacity, RBC Capital Markets analyst Robert Stallard wrote in a note to clients.

Asia and long haul driving ASMs:

The US makes up roughly 30 percent of global capacity, and prior to today, the analyst had expected the US to see capacity growth similar to GDP growth, so flat to up low single digits.

On an aggregate basis, this is what the US airlines are also forecasting, even after these capacity plan changes. The analyst said his forecast of about 5 percent global ASM growth this year is much more reliant on continued strong growth in Asia, with capacity up high single digit, and expansion in long haul routes, particularly out of Europe.

High oil impacts all airlines, but it is yet to be seen how these critical growth markets adjusted downwards by airlines, as passenger demand (and pricing) has remained robust.

Aftermarket Growth In The Spotlight:

The cuts to US airline capacity plans for 2011, starting with American a few weeks back, has had a negative impact on investor sentiment with regard to the aerospace aftermarket, and the potential growth this year.

For instance, Goodrich (NYSE: GR) is down 4 percent year-to-date, and B/E Aerospace (NYSE: BEAV) declined 7 percent. Indications are that the first quarter aftermarket volumes have continued to grow in line with the fourth quarter trends, and expected this to be apparent in upcoming earnings.

The impact of these US capacity plan adjustments is unlikely to be seen in the first quarter numbers, but it is likely to justify continued management caution with regard to 2011 forecasts, and we do not expect these to be raised in the first quarter results, Stallard said.

As a result, the analyst thinks about 5 percent global ASM growth this year is still achievable and he remains comfortable with its forecast of 8-12 percent aftermarket growth for aerospace suppliers in 2011.

We expect the first quarter from aerospace companies to provide some reassurance, and we would be taking advantage of recent weakness in related aftermarket names, the analyst said.