Airline industry is poised for shakeout

With Northwest and Delta airlines both in bankruptcy court this week, four of the nation's "Big 7" airlines are now in Chapter 11, which raises the question: Why don't they just raise their prices more, as other industries struggling with high fuel prices have done?

The answer is a complex mix of tight competition, not only with low-cost carriers, but with buses, trains, and automobiles as well.

There's also the already-battered state of the traditional carriers' balance sheets. They didn't have the cash to hedge cheap fuel, the way flush low-cost carriers like Southwest did. So the majors will just keep racking up losses, which could mean a very different aviation industry in years to come.

"In order to fund those losses, the industry has taken on a huge load of debt," says aviation economist Dave Swierenga of AeroEcon Consulting in Vienna, Va. "When you talk about taking the longer view, that debt load will have detrimental consequences for many years to come."

Indeed, with jet-fuel prices still astronomical compared to historical norms and competition from efficient low-cost carriers fiercer than ever, the future, in the words of James May, the airlines' top lobbyist, "is not bright."

Since 2001, the US aviation industry has lost $32 billion. If fuel prices stay about the same, as expected, it's on track to lose another $10 billion by the end of this year. The chief culprit is the rising cost of jet fuel, according to the airlines. It's jumped more than 240 percent in the past four years, from 56 cents a gallon in 2001 to $1.92 today.

"It is clear that if not for the prices we must pay, the airline industry would be profitable," Mr. May, president of the Air Transport Association, told Congress Wednesday as he pleaded for them to suspend the jet-fuel tax. "Indeed, we remain at the mercy of oil markets and the federal government."

But that's a much too simplistic reading of the problem, other analysts contend, and one that in the end could hurt consumers. They note that while most of the traditional carriers are struggling, low-cost carriers like Southwest and JetBlue are thriving - so the future isn't so grim for all the airlines after all.

They blame the majors' current woes on a history of poor management, overly generous labor contracts, and a sometimes irrational reluctance to change in the face of a clearly transformed marketplace. They do credit the big airlines for working the past few years to increase their efficiency and bring down labor costs, but for some it may be too little too late.

"It's not that airline travel is something whose time has come and gone, but rather that these are difficult competitive times with a lot of change," says Clint Oster, a transportation economist at Indiana University at Bloomington. "Some folks have positioned themselves better than others. So while we may see some weeding out, I think we'll see other folks coming in saying, 'We can do better on a different kind of business model.' "

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