Many cities face flight cuts

At least 100 will see route cuts. Economic ripple effect may be broad.

SOURCE: The companies; Department of Energy/AP

From Butte, Mont., to Hagerstown, Pa., more than 100 small and medium-size cities across the US will see reductions in airline service by year's end. Some communities will lose commercial service altogether.

Surging oil prices, driving up the cost of jet fuel, are behind the cuts. For the first time in aviation history, airlines are forced to reduce the number of flights offered and eliminate some destinations even as demand for their services remains high.

The result: It will be harder for many Americans to get from where they are to where they want to go, planes will remain elbow-room-only packed, and ticket prices will soar higher.

The aviation reductions will also produce economic ripples that extend far beyond those airports with newly empty tarmacs, some aviation experts warn.

"This is not about Butte. This is about the national economy," says Roger Cohen, president of the Regional Airline Association. "Commercial air service is part of the backbone of the American economy.... All of the industries that have grown up with cheap, competitive airfares over the last decade will be affected."

The impact of the service cuts probably won't be felt until 2009, because most aren't slated to go into effect until fall. The summer schedule has been pretty much set and sold for months. But here's the rub: Most of the tickets for the peak summer season were sold before oil skyrocketed above $130 a barrel. That means that even as passengers are packed like sardines into planes and it would appear that the airlines should be raking in huge profits, the carriers are actually losing money.

"Probably 70 percent of the seats that will be flying in the next two months will be flying at rates that lose money because [airlines] sold them when oil prices were less," says aviation analyst Michael Boyd, president of The Boyd Group in Evergreen, Colo.

To make up the losses, airlines must ensure that in the future they fly only very profitable routes. As a result, some communities where airlines rely on regional jets that guzzle a lot of fuel will see service cuts, even though plenty of passengers may still want to fly from there. Mr. Boyd cites Delta's service to Lansing, Mich. While the airline can easily fill 85 percent of the seats on three regional jets a day, it doesn't make enough money on each seat to justify the cost of filling those fuel tanks three times a day.

"The local yield is less than the cost of flying it, and what you're feeding to the carrier to connect to the rest of the Delta flights brings in less than the cost of flying it," he says.

The solution is to cut flights and raise prices. Of course, airlines know that when prices go up, demand comes down. So airlines are cutting the number of flights not only to prevent losses, but they're also cutting flights in anticipation that fewer people will fly precisely because ticket prices will jump.

Some aviation analysts, including Mr. Boyd, don't believe the big cuts will have the kinds of dire economic consequences that others predict. Instead, they say, travel will just be a bit more inconvenient, especially for people living in small and medium-size cities.

"Airlines are thinning. They're not wholesale removing themselves from markets," he says. "Delta Airlines is still serving Lansing, Mich., except they're not serving it from Atlanta anymore."

Still, thousands of people in small cities and towns where carriers are cutting back are now scrambling to make alternative arrangements, especially those booked for Thanksgiving and Christmas. One example is in Medford, Ore., where US Airways Express plans to discontinue service on Sept. 2. Four other carriers serve the airport, so passengers can still get out of town. But it may not be as easy as before and it will certainly cost more.

Some small communities, mostly in Alaska, have already lost all air service because the small airlines flying there went bankrupt due to high oil prices.

But air service will eventually resume in most because of what's known as the Essential Air Service Program (EAS). It was created in 1978 when the airlines were deregulated. At the time, Congress worried that small cities and towns that had airline service in the regulated market would lose it when regulations were lifted. So lawmakers set up a subsidy program to ensure that those cities and towns would continue to have air service even if it became unprofitable for carriers. For years, critics have said the complicated program needs a radical reform. The Bush administration has regularly cut EAS funding in half, only to have Congress restore it. Analysts say oil-price spikes are going to drive EAS costs higher, making reform an even higher priority. But they also note that the EAS issue, while tied to high oil prices, is entirely separate from the capacity cuts major airlines are making.

There's also disagreement over the economic impact of service cuts. Airports and the revenue they generate have a ripple effect on the communities where they're located, notes David Castelveter of the Air Transport Association, which represents the major carriers. Commercial and cargo airlines in the US drive an estimated $1.1 trillion of economic activity annually.

"When a carrier either leaves a city or begins a capacity reduction … its impact is broad, not just on the airline itself but on all of the [associated] businesses," says Mr. Castelveter, "whether it's the caterers of the airplanes, the people that fuel them or put in the magazines, the airport vendors. It has a huge hit."

To help put the aviation bind into perspective, think about this: In 2000, the average one-way ticket in the United States cost $175, according to Boyd. In 2007, the average was still $175, but 12 percent less of that now goes to the airlines because government fees have jumped. Airlines' fuel bills, meanwhile, have soared. In 2000, passenger and cargo carriers spent $16 billion on jet fuel. Last year, they spent $41 billion. They're expected to pay $61 billion this year.

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