Tough times force airlines to scale back

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

from the March 20, 2008 edition

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"This is the first time that airlines have been able to adjust to what would otherwise be a major disaster," says Michael Boyd, an aviation analyst in Evergreen, Colo. "More important, it's the first time in history that airlines have found it necessary to reduce capacity in the face of strong demand."

The recent price hikes haven't yet translated into a drop in the number of people choosing to fly. But many experts contend it's only a matter of time. Right now, the price of the average ticket is still lower than it was in 2000, when oil was just $28 a barrel. Since then, the large network carriers have undergone a major restructuring, cutting costs and redrawing route structures to save money.

But with oil hitting $111 a barrel – double what it was a year ago – even the leanest airlines will have to hike prices more, say experts. "Over the past year, we've led several price increases as the cost of oil has increased," Beverly Goulet, American Airlines' treasurer, told the JP Morgan conference. "But the disconnect between the modest yield increases we've been able to achieve and the blows the industry is taking on fuel expenses is a big problem for us and our peers."

Five years ago, when American Airlines was working to avoid bankruptcy, it was paying 88 cents a gallon for jet fuel. Last year, the company paid $2.13 a gallon, according to Ms. Goulet. That translates into an additional $4 billion in added expenses.

This past January, it paid $2.64 a gallon. "The industry needs to find ways to cover the cost of this expensive input," says Goulet.

Many aviation experts believe airlines will cover some of those costs by hiking ticket prices. And that, along with the weakened economy, is expected to prompt many travelers to look for diversions closer to home. "When people have to start paying the real cost of [flying] ... there will be far fewer of them willing to take 'on a moment's notice' trips," says Mann.

Some analysts like Mr. Boyd say that even if fewer Americans fly, most airlines will weather these tough economic times better than they have in the past. That's because of actions they're taking now to cut capacity and the restructuring they've done in the past six years.

Nevertheless, some companies are expected to take a hit during this downturn, especially the small companies that lease small commuter jets, which are less fuel efficient, to the big airlines. "They used to be known as the regional airlines," says Boyd. "They're stuck with about 1,500 planes that don't really have much economic future."

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