The March 11 tsunami interrupted air traffic at most Japanese airports. The U.S. airlines cancelled most flights to and from Japan following the calamity. While the Sendai airport remains flooded, the Narita Airport, the main international gateway into Japan, is also closed. Haneda, Japan’s busiest airport has, however, reopened.

Delta Air Lines Inc. (DAL), which operates more flights in Japan than any other U.S. carrier, cancelled 29 out of its 60 daily flights in and out of Tokyo as a result of runway and facility closures. United Continental Holdings Inc. (UAL), the largest U.S. airline, diverted seven United and two Continental flights, and cancelled ten United and one Continental flights. American Airlines, a wholly owned subsidiary of AMR Corporation (AMR), also cancelled all its flights to the affected country on the day of the disaster.

However, the major airlines have rerouted their flights and are offering several alternatives to exchange or ticket refunds. United, Delta and American Airlines are currently waiving fees for passengers to rebook flights to Japan. These moves might raise operating costs of U.S. airlines even more. But these costs can be passed on to passengers in the form of extra fee or fare hike, a move that has already happened six times this year.

In our opinion, the tsunami is a temporary concern for the airline industry, which is on a recovery path owing to strong demand for air travel. Customer attitude toward ticket price hikes, to counter escalating fuel prices, has also been positive so far. In this regard, the drop in oil price to below $100 a barrel post-tsunami might work in favor of the U.S. airline industry.

In a desperate attempt to control the situation, U.S. carriers have resumed their services to Japan and diverted their flights to other airports. Although the airlines are trying to keep losses at bay, we have to wait and watch how well the alternatives, like rerouting, waiver policies and persistent fare hikes, work.

We are currently maintaining our long-term Neutral rating on Delta Airlines and United Continental Holdings. For the short term (1-3 months), Delta and United hold the Zacks #4 Rank (Sell) while AMR Corp. retains the Zacks # 3 Rank (Buy).

 
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