Fuel Costs Squeeze U.S. Airlines
Wednesday, April 23, 2008
Faced with skyrocketing fuel bills, major U.S. airlines have announced nearly $1 billion in losses for the first three months of the year, a financial toll that is forcing carriers to slash flight schedules, cut jobs, add passenger fees and even seek potential merger partners.
UAL, parent of United Airlines, yesterday became the latest company to reveal the pain of rising fuel prices, reporting a loss of $537 million in the first quarter.
"It was obviously a very difficult and challenging quarter for us and the industry," United's chief executive, Glenn F. Tilton, told reporters and analysts during a conference call. United, which has a major hub at Dulles International Airport, made a profit of $403 million in 2007.
There has been a run of such announcements. AMR, parent of American Airlines, last week posted a $328 million first-quarter loss, and Continental Airlines announced it lost $80 million. AirTran Airways yesterday said it lost $34.8 million, and JetBlue Airways reported an $8 million loss. Four carriers -- Frontier, ATA, Aloha and Skybus -- have sought bankruptcy protection in recent weeks, in part because they could not cope with fuel costs, analysts said.
Airline stocks fell sharply on yesterday's news. Shares of UAL plunged 36.8 percent, to $13.55. Delta Air Lines dropped 17 percent, to $6.80, and AMR declined more than 14 percent, to $7.02.
Delta and Northwest Airlines announced a merger deal last week that executives said would help them better weather high fuel prices. Both carriers are expected to report substantial first-quarter losses at conference calls today.
All told, with jet fuel prices more than twice as high as they were in January 2007, major carriers are expected to easily exceed $1 billion in losses for the quarter, analysts said.
Although fuel bills are a major headache, they are hardly the industry's only challenge. New international agreements are expected to spur more competition between U.S. carriers and overseas rivals. A weakening dollar may start hurting demand for lucrative transatlantic flights. And regulators appear to be taking a tougher stance on carriers' compliance with safety mandates, forcing them to undertake costly and time-consuming reviews of their records and planes.
"They have just barely managed to work their way back to some semblance of profitability, and this will probably turn the cycle back around in the other direction," said Dawna Rhoades, the associate dean of the school of business at Embry-Riddle Aeronautical University in Florida.
Richard Anderson, Delta's chief executive, told reporters in Washington yesterday that airlines would have to raise ticket prices 10 to 15 percent to just break even.
"We're in uncharted waters," said Northwest's chief executive, Douglas M. Steenland.
Executives at several airlines are talking about combining operations. United is often mentioned as a potential partner with Continental or even US Airways. American could go after Continental or Alaska Airlines. Many analysts have said that, in the next year, there may be as few as three or four major network carriers, down from the six today.
Saying that fuel costs make the case for mergers "more compelling," United's Tilton said consolidation is a "necessary step" for profitability.
In the meantime, Tilton and others have announced cost-cutting moves and increases in fees.
American Airlines, for example, has announced hiring freezes, flight reductions and the accelerated retirement of its gas-guzzling fleet of MD-80 jets. But even those steps are probably not enough to offset fuel prices, executives said.
"Based on where we sit today, we are nowhere near recovering from . . . this extraordinary increase in fuel price," American's chief executive, Gerard Arpey, told analysts in a conference call last week.
Yesterday, United executives said they were going to cut about 1,100 management and front-line jobs and boost the number of planes they are grounding, selling or returning to leasing companies. By year's end, executives expect to ground about 30 of the carrier's 460 planes.
The carrier also plans to further reduce domestic flying by 9 percent by year's end. That means United will be offering 14 percent fewer seats to domestic passengers by December than it did in late 2006.
Executives said United is going to trim spending by $400 million and is examining potential fee increases to boost revenue. The carrier took the lead among major airlines when it announced in February that passengers would have to pay a $25 one-way charge to check a second bag. In recent days, United also boosted the fee it charges passengers to change itineraries from $100 to $150.
Among the other fees under consideration would be to charge passengers to select seats during booking. US Airways announced last week that it would charge many passengers at least $5 to chose window and aisle seats in the front of many of its planes.
"You know, frankly, you can imagine that if we have a fee, we are evaluating raising it," said John P. Tague, an executive vice president and the chief revenue officer at United. "And, in most cases, we've determined, in this environment, it's appropriate."
Staff researcher Richard Drezen contributed to this report.