Airlines finally making money

Tightfisted tactics, higher fares pay off amid rising fuel costs

July 28, 2006|By MEREDITH COHN | MEREDITH COHN,SUN REPORTER

Airline passengers might not enjoy paying higher fares to be crammed into full airplanes with little more than a bag of peanuts for sustenance, but that cash seems to be helping the nation's carriers finally put the brakes on their multibillion-dollar, multiyear slide.

In the past week and a half, eight airlines have reported that they finally made money in the second quarter after years of losses, earned more than last year or, in the cases of Southwest Airlines and AirTran Airways - Baltimore's No. 1 and 2 carriers, respectively - had their best three months ever.

And it's not just the discounters: United Airlines, which hadn't reported a profit in six years, and US Airways, which had filed for bankruptcy twice since 2002, both made money.

Airline officials and experts still warn that spiking fuel bills and the economy's uncertain direction leave the industry on less than stable ground, and they cautioned that the second quarter usually is the industry's strongest. But the fare increases and years of cost-cutting contributed to the kind of quarter the industry hasn't seen since 2000.

"Everyone likes to be in the black, even if it's just for a quarter," said John Heimlich, chief economist at the Air Transport Association of America, an industry trade group.

"To make any money at these fuel prices says a lot about the potential for this industry. But vigilance is the word of the day."

In the past five years, domestic airlines have lost a combined $35 billion, he said. Together, the carriers still are expected to lose a half-billion dollars this year.

The second quarter is traditionally the best for airlines because people are buying tickets for summer vacations. But there were two big differences this year. Fares have risen 11 percent on average in the past year, the largest increase since 2001. And airlines are no longer wasting money flying half-empty planes: The average flight on many carriers last quarter was more than 80 percent full, records for them, as more passengers squeezed into fewer available seats.

The trouble is, demand always falls off in autumn. And there's a risk that those fare increases might eventually put some people off travel, Heimlich said.

Still, the numbers were encouraging to many airlines, particularly ones recently out of bankruptcy.

The results were all the more remarkable, analysts said, because the price of a gallon of jet fuel has more than doubled since 2000 and the older so-called legacy airlines didn't have the money to lock in moderate fuel prices in advance through hedging contracts, as some discounters were able to do. The increases have made fuel the biggest cost for the industry, topping labor, long the biggest expense.

Henry H. Harteveldt, chief travel analyst for Forrester Research in San Francisco, called the secret to the financial improvement "discipline."

Major carriers have shifted planes to more profitable international routes. They reduced their work forces by pushing passengers to book on the Internet and to check in at kiosks. They charged more for oversize baggage, food and some preferred seats; they added fuel surcharges on top of fare increases.

But he warned of pushing too much of the recovery onto the backs of passengers.

"Travelers, especially frequent business travelers, know their fares have gone up, but amenities remain invisible," Harteveldt said. "If airlines don't invest in product and service improvements, their profitability may be short-lived, as passengers become increasingly price-focused and less willing to pay high fares for a poor product."

That is not lost on executives at discounters and the big network carriers, who have been raising fares incrementally to see how much passengers will take. For now, the airlines reported they are traveling in record numbers - an estimated 207 million this summer compared with 204 million last summer - and completely filling a record number of planes.

Southwest, the only airline to remain consistently profitable since 2001, has raised fares four times this year, and others have followed suit. Chief Executive Officer Gary Kelly said he would continue to raise fares "only to offset soaring fuel prices. And fuel prices will indeed rise."

But as much as fares have risen, fuel costs have risen even faster - 29 percent since last year.

That has prompted belt-tightening not as visible to passengers. Airlines have parked hundreds of less fuel-efficient planes, dropped unpopular routes and reduced the overall number of available seats in the past year by 1.4 percent - up to 20 percent on some carriers. They have sliced their work force by almost a third in the past five years, and many have forced wage and benefit cuts on unions.

The legacy carriers reduced their debt in bankruptcy proceedings or restructuring and found new revenue streams. US Airways merged with the healthier American West Airlines.

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