Tough times force airlines to scale back

With rising fuel costs and a recession in the wings, airlines are cutting jobs and hiking prices.

By Alexandra Marks | Staff writer of The Christian Science Monitor

from the March 20, 2008 edition

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New York - Fly the shrinking skies of United – and most major American carriers. With fuel prices reaching record highs, a recession on the horizon, Wall Street battering their stocks, and the American dollar sinking to new lows, airlines are scaling back operations.

They're grounding planes, cutting domestic capacity, and eliminating jobs. American Airlines even plans to sell off its regional carrier, American Eagle.

They're all hoping to strengthen their frail bottom lines in the face of stiff economic headwinds. And for the flying public, all this retrenching will mean higher ticket prices, more fare restrictions, and decreased access to some smaller cities.

"The party's over, particularly for leisure travelers," says Robert Mann, an aviation analyst in Port Washington, N.Y. "The public has benefited from six years of remarkably low pricing which is going to come to an end."

Last week, some airlines hiked prices an average of $50 per round trip. Aviation analysts say with oil hitting $111 a barrel, that's just a start of a spiral that could lead to even higher prices in the near future. That's because of the relationship between price and demand. When ticket prices go up, fewer people usually choose to fly. And when fewer people fly, it costs more to operate the planes, and prices may go up yet again. So airlines are preparing for a double whammy.

"Economic growth is so weak that these price increases will immediately translate into a loss of customers," says Mr. Mann. "Combine that with weaker demand due higher energy costs and there's a very immediate need to cut capacity."

In a round of meetings with JP Morgan this week, airline executives lined up to announce one after another that they were doing just that.

Delta plans on eliminating 2,000 jobs, cutting back domestic flights by as much as 10 percent, and grounding 40 planes. United, too, is cutting domestic flights and plans to ground about 20 planes. American is also cutting domestic flights and some analysts expect it will announce plans to park some planes in the next few weeks.

The cuts may sound grim, but to some aviation analysts accustomed to the industry's historic boom and bust cycles there's actually some good news here.

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