Fuel costs send airlines diving into red ink
* William Moroney, a credit-union official based in Washington, enjoys flying these days because he's occasionally finding "a delightful empty seat next to me." That gives him more leg room to stretch out during his trips.Skip to next paragraph
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* United Airlines, the nation's largest carrier, earlier this year announced slashes in the frequency of flights to a number of smaller US communities because they are no longer "economically feasible," a spokesman says.
* At Air Florida, fuel costs have shot up to 89 cents a gallon, more than double the 35 to 36 cents a gallon paid in early 1978, says company official Tino Gonzalez.
What's happening at United, Air Florida, and on trips like those taken by Mr. Moroney is not altogether unfamiliar to frequent air travelers. The skies are turbulent for the giant US airline industry these days -- so much so, in fact, that some trade analysts argue that how well the carriers weather their current squalls will largely determined the composition and route structure of airlines for years to come.
"This is a transitional year for the airline industry," argues Michael Derchin, a financial analyst with Oppenheimer & Co., a New York brokerage house.
Mr. Derchin notes that because of weakening passenger traffic many carriers now are deliberately cutting back on the number of flights, while fuel costs continue to climb. Mr. Derchin, for his part, does not see the present federal "rate structure" on fares set by the Civil Aeronautics Board "offsetting fuel increases . . . in a timely way."
Last year, a number of major carriers -- including Braniff, Continental, United, and TWA -- operated in the red, despite steadily rising ticket prices and high passenger levels.
For 1980, analysts say, half or more of the 10 largest US airlines may see their profit margins slide into the red -- again this year, as last year, because of sky-rocketin fuel, and, to a lesser extent, overall manpower costs.
What the current "profit-loss traffic squeeze" on the industry means, analysts say, is a reshaping of the industry itself:
* Less frequent flights to "marginal" or smaller communities.
* The grounding of older, less fuel-efficient jets, like the Boeing 707 and Douglas DC-8. In their place: the new breed of smaller jets, like the DC-9 and Boeing 737, or large jumbo jets, like the Boeing 747 and Douglas DC-10.
* A no-holds-barred scramble involving special discounts, half-fare coupons, and other promotional come-ons to lure the public back onto planes.
For the major trunk airlines -- national carriers that crisscross the US, including American, United, TWA, Northwest, and Delta -- passenger mileage is down 0.6 percent for January 1980, compared to the same period a year ago, according to the Air Transport Association (ATA).
Significantly, according to William Osmun, an official of the ATA, that is "the first time" since the 1974-75 recession that passenger levels have fallen off.
Despite grumbles from the airlines that fuel costs now are rising too frequently for the financial well-being of the industry, the Civil Aeronautics Board (CAB) has not yet altered its rate-setting timetable.
Nor is the CAB as gloomy as the carriers about traffic. Whatever the current patterns, the CAB notes that overall traffic for the 12-month period ending November 1979 jumped 9.9 percent over the previous year.
The CAB also argues that steady rate increases -- now coming roughly every two months -- are more than enough to offset fuel increases. The board authorized a 2.5 percent rate hike in March of this year, following hikes of 3.3 percent in January; 3.7 percent in November 1979; 9.5 percent in September 1979; 6.6 percent in July 1979; and 4 percent in May 1979.
another increase is scheduled in May.
Ironically, the current downturn in traffic -- assuming the January measurements (the most recent data available) are correct -- comes at a time when most carriers have commitments with plane manufacturers for billions of dollars worth of new aircraft. How well the companies ride out any recession this year, therefore, could have a considerable impact during 1981 and 1982 on the builders -- Boeing, Douglas, and Lockheed.
Does the current traffic decline, coupled with mounting costs, presage a rash of mergers or bankruptcies?
Most industry analysts think not, although it is no secret that company board rooms are nervously watching the present industry downturn. In fact, many analysts believe that because of the current retrenchment an overall airline system will emerge that is stronger than ever.
The industry already is enjoying limited deregulation, which allows carriers to enter and leave routed more quickly than ever. The CAB will disappear by the mid-1980s.
Furthermore, regional carriers, like US Air, are noticing particularly heavy traffic patterns as more businessmen fly, rather than drive, to not-too distant business meetings.
Finally, some analysts, like Edmund S. Greenslet, of Merrill Lynch, Pierce, Fenner & Smith, say they believe that, precisely because airline stocks are weak , now is time to buy them. Mr. Greenslet says that although traffic will be down this year (with estimates ranging to as much as 5 percent), he does not believe that will mean bankruptcies or mergers.
Even more wary analysts, like Mr. Derchin, see no major damage to the industry this year -- although profits are expected to be down and many companies in the red. But for the long haul, going into the 1980s, Mr. Derchin says, the industry is "looking good."