Fuel Crisis Changes Airlines' Flight Plans

A US Airways Airbus A319 takes off from Pittsburgh International Airport on Thursday, Oct. 31, 2002. Along with four other major U.S. airlines (American, United, Continental and, three months previously, Delta), US Airways has announced sizeable capacity and job cuts as it tries to deal with soaring jet fuel prices that recently have averaged over $4 per gallon. Credit: AP Photo/Gene J. Puskar

With fuel costs hovering stubbornly at record highs, airlines are abruptly changing course by suspending flights, slapping new luggage fees  on travelers, raising fuel surcharges on tickets, switching to smaller planes, grounding older, inefficient aircraft and raising fares.

Industry-watchers say the current, fuel-driven crisis may be worse than the sharp drop in consumer demand that sent four major U.S. carriers into bankruptcy following the Sept. 11, 2001, terrorist attacks. That was one catastrophic event; this is a rolling crisis with no end in sight.

American Airlines, the world’s largest carrier, plans to cut domestic capacity by 12 percent in the fourth quarter of this year, lay off perhaps thousands of employees and charge for checking bags in economy class. American also says it will stop flying between Chicago and Honolulu and suspend some Los-Angeles-Hong Kong service.

United Airlines will cut domestic capacity 15 percent in the fourth quarter, slash 1,500 jobs and jettison its low-fare unit Ted.

Continental Airlines plans to cut domestic capacity by 11 percent in the fourth quarter and shrink its staff by 3,000.

US Airways will reduce its fourth-quarter capacity 6 to 8 percent, trim 1,700 jobs and join other airlines in charging $15 for the first checked bag.

Some will be forced into liquidation

Even all that may not be enough. In a report released Friday, the Business Travel Coalition and AirlineForecasts LLC predicted “several large and small U.S. airlines will default on their obligations to creditors beginning at the end of 2008 and early 2009 ... and of those, some will be forced to liquidate."

The study doesn’t specify which airlines could liquidate, but warns that some famous names in aviation will soon join the likes of TWA, Pan American and Eastern Airlines.

In the meantime, Goldman Sachs industry analyst William Greene wrote in a research note that airline plans to pare operations and raise fares are “a step in the right direction in right-sizing the industry.’’

But for consumers, this is unalloyed bad news. It means planes will be even more crowded and uncomfortable, there will be fewer conveniently scheduled flights — especially non-stops — and everything will cost more, from checking bags in economy class to changing bookings.

Reversing its earlier prediction of a profitable 2008, the International Air Transport Association says the world’s airlines will lose $2.3 billion this year if a barrel of crude oil averages $107 for the year; if oil averages $130, industry losses — led by reeling U.S. carriers — will reach $6.1 billion.

Non-U.S. airlines have problems too

Foreign carriers are not immune. Just in the past 10 days, Thai Airways, Qantas, Air France, Lufthansa and British Airways have raised their fuel surcharges. Moreover, BA chief executive Willie Walsh told the International Air Transport Association (IATA) meeting in Istanbul early this month that his carrier, one of Europe’s largest, intends to make unspecified service reductions this fall. Finnair, citing fuel costs, said it will slash 500 jobs.

IATA director-general Giovanni Bisignani added that one solace for travelers — the worldwide success of low-cost carriers (LCCs) — is also in jeopardy. Most LCCs spend a higher percentage of their budgets on fuel than their mainline competitors and are thus potentially more vulnerable to the soaring cost of jet fuel.

So far, airlines that have failed in the U.S. market have been mid-sized low-cost carriers such as ATA, small niche carriers such as Eos — which operated all-business class flights between New York and London — and regional players like Hawaii’s Aloha Airlines.

Analysts say U.S. carriers must raise fares 20 percent and slash capacity by 20 percent just to keep flying, let alone make a profit. Additionally, some say, major U.S. carriers need to merge outright or at least forge closer working alliances to fly through the crisis.

Consolidation or culling?

Star Alliance is one of three global associations that allow airlines to do joint marketing and maintenance and issue tickets on each other’s flights. Oneworld and SkyTeam are the other two. At a meeting of the Star Alliance airline CEOs in Beijing last December, United’s chief executive officer, Glenn Tilton, told journalists “Consolidation is the answer."

So far, it hasn’t happened. United, which lost $537 million in the first quarter of this year, has held failed talks with two potential merger partners, Continental and US Airways, in recent weeks. Delta and Northwest are still attempting to effect a merger.

Should mergers and tighter alliances not get the job done, at least a few airline executives think a Darwinian culling of weak carriers would turn out to be a good thing. Virgin Atlantic Airways chief operating officer Steve Ridgway was quoted in media reports last week saying U.S. authorities should allow airlines to fail instead of restructure in Chapter 11 protection.

“Carriers are going to go out of business, and need to go out of business," Ridgway said bluntly. “Ultimately, the industry is going to have to re-price."

In such a decidedly bearish future, higher fares may be the least of many evils for air travelers.

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