A casual observer of the struggling airline industry might think the nation's biggest carriers are either inept for losing billions of dollars...
A casual observer of the struggling airline industry might think the nation’s biggest carriers are either inept for losing billions of dollars with no end in sight, or pretty clever for managing to stay in business through it all.
Neither image would be fair.
The bulk of the industry, whose first-quarter results come out this week and next, has no easy way to turn around its fortunes, analysts say. Factors such as soaring fuel prices are beyond its control. The pressure to keep fares low has barely let up. And a legacy of inefficient operations will take a few more years — and contract negotiations — to fix.
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At the same time, it isn’t necessarily stellar management decisions that have kept the sickest airlines from going out of business. Lenders, suppliers and regional airlines with vested interests in the carriers’ survival have committed a steady stream of capital to keep the industry hobbling along.
While their strategic options are limited, executives haven’t given up. They’re still trying to squeeze labor costs, raise extra revenue where possible — such as selling in-flight snacks — and lobby the government to stop an increase in security fees and ease pension-fund obligations.
Carriers have recently raised fares on four separate occasions, though the added revenue won’t go nearly far enough, analysts said.
“The current crisis that is upon us is driven by fuel prices,” said Dan Garton, executive vice president at AMR Corp., the parent company of American Airlines, the nation’s largest airline.
That doesn’t excuse the industry’s other fundamental problems, such as a capacity glut and unprofitably low fares, but the high price of fuel has masked significant cost-cutting progress, Garton said. Even so, he said, “we need to continue to lower our costs,” he said.
American did just that Thursday, cutting more than 500 employees at its Kansas City, Mo., maintenance base.
It has $3 billion in cash, giving it ample breathing room even if fuel costs remain high. But industry officials and analysts say that, without more financing, other carriers could face liquidity crunches by the end of 2005.
“Something’s got to give,” said John Heimlich, chief economist at the Air Transport Association, a trade group. “At the end of the day, I do believe in math. And there’s just not enough revenue to go around for all of these players.”
Analysts expect all the nation’s large airlines to report first-quarter losses, except for some regional carriers and low-fare JetBlue Airways and Southwest Airlines, which is scheduled to be first to release its results Thursday. The industry’s quarterly losses may exceed $2 billion, analysts said.
Since 2001, the U.S. airline industry has lost more than $30 billion due to an economic downturn, the effects of terrorism and the rapid growth of budget airlines, among other factors. If oil prices remain high, the industry could lose $5 billion more in 2005, analysts estimated. They won’t rule out the possibility of further bankruptcies and even a liquidation.
US Airways and United Airlines are the largest U.S. airlines in Chapter 11, and Delta Air Lines has warned it might also seek bankruptcy-court protection from creditors.
When asked about the company’s ability to avoid Chapter 11, Delta CEO Gerald Grinstein told investors recently he believed the company would pull through. After a pause, he added: “I hope.”
There are outside factors — from high fuel costs to the boom in online travel booking — working against the largest carriers.
Jet-fuel prices average about $1.60 a gallon on the New York spot market, up 65 percent from a year ago.
At the same time, domestic nonrefundable fares are 1 percent lower than last year, and unrestricted fares are 33 percent lower, according to an analysis of 100 markets by New York-based consulting firm Harrell Associates.
Once-opaque ticket pricing is now transparent, thanks to the proliferation of online travel sites, where bargain-hunting corporate and leisure travelers are helping to turn air travel into a commodity.
John Donnelly of Eclat Consulting in Reston, Va., said he does not expect any major carriers to liquidate.
The more likely scenario, he said, is troubled carriers will continue “limping along” until fuel prices drop to more manageable levels, capacity tightens and demand rises enough so that fares can hit profitable levels.