A great time to fly, unless you're a major airline
For air travelers, this is the best of times.Skip to next paragraph
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Prices are lower than ever and choices abound, from a wide array of destinations to the style in which to fly - from Southwest's economy seat scrum to kicking back in the luxury of first class.
But for many of the airline industry's largest carriers, this is the worst of times. Fuel prices are skyrocketing, business travelers are still opting for economy seats, and the success of a string of low-cost carriers - from JetBlue to AirTran - are giving them a run for their money they never anticipated. Analysts have upped the industry's loss projections for this year from $500 million to $2.3 billion.
Put it all together and experts contend a transformation is under way that will make the American airline industry leaner, more efficient, and far more consumer friendly in the future - at least those carriers that survive.
"The airline industry has switched, along with every other industry, from being supplier driven to consumer driven and that's forcing a re-alignment. There's a mad rush to become low-cost producers," says Kevin Mitchell of the Business Travel Coalition in Radnor, Pa. "The major carriers are going to be in a state of long-term decline unless they reinvent themselves."
Just last week United Airlines signaled it needed more time to emerge from bankruptcy. American Airlines is gearing up for what are expected to be bitter labor negotiations that some analysts believe could make or break the airline. Delta, which is deeply in debt, just had its credit rating pegged down two notches due to its continued losses. And USAirways is still struggling to increase its revenues, despite just having emerged from Chapter 11.
Those traditional major carriers - known as the legacy network carriers - have been working since the 2001 recession and the Sept. 11 attacks to regain their footing. United and Delta started their own versions of the low-cost carrier to compete with JetBlue and Southwest. Bankruptcy allowed United to bring its labor costs down significantly, and American followed suit, after barely averting a Chapter 11 filing.
Still, it's been a rocky road to recovery, stalled in part by the sluggish pace of the economy, lingering fears over terrorism, and increased hassles due to heightened security. In the past few months, spiking fuel prices have provided another unpleasant jolt, particularly to the carriers like United and USAirways, which are in the most precarious financial positions. Every penny per gallon increase in the price of jet fuel costs $180 million to the industry, according to John Heimlich, chief economist of the Air Transport Association, the major carriers lobbying organization.
"It's more bad news, and in my mind it erases any chance of industry-wide profits for '04 and makes it more [dubious] for '05 depending on what happens with crude oil in the next year," he says. "Looked at another way, it wipes out or offsets the lions' share of management of cost savings so far."
For years, the network carriers depended on big spending business passengers to underwrite their leisure travel fares. But during the recession and post Sept. 11 economic doldrums, business travelers discovered that it's easy to fly for less, thanks in part to the growth of Internet booking and the success of low-cost carriers. Some analysts believe that business travelers willing to pay five times as much as the grandmother sitting in the seat next them are gone forever.
That would leave the major airlines, which built their businesses around those high-paying travelers, with unsustainable cost structures.