The summer is traditionally one of the airline industry's strongest financial periods, thanks to all the vacationers who take to the air to reach their favorite getaways.
But not this season. People may be flying in greater numbers than they have in years, but several airlines are losing money amid higher fuel prices and a fierce industry-wide fare war.
Four major airlines -- Delta, United, US Airways and Northwest -- are each trying to cut their costs and dramatically overhaul their operations to return to profitability, pitting executives against their front-line employees in wrenching labor negotiations. It's the first time since the Sept. 11, 2001, terrorist attacks that so many major carriers are seeking concessions from their workers.
The airlines' problems come as the economy is growing at a healthy pace and the carriers are filling more than 80 percent of their seats on many routes -- the highest percentages since the attacks.
"If airlines are still losing money in the summer, then when can they make money?" asked John Heimlich, chief economist with the Air Transport Association, which represents the nation's air carriers.
Heimlich said the crunch will likely force the industry to consolidate in the next two to five years.
The struggling airlines are largely the victims of an industry upheaval brought on by the success of no-frills airlines and the ease of shopping for cheap fares on the Internet. Low-cost airlines such as Southwest, JetBlue and Air Tran now make up about 70 percent of the nation's route system, compared with just 30 percent a decade ago.
They have forced the big, old-line airlines such as American, United, US Airways and Northwest -- which the industry calls "legacy carriers" because they operated in the days before deregulation in 1978 -- to slash fares by as much as 40 to 60 percent, pushing average prices down to their lowest levels in more than 15 years.
And the upstarts have continued to put on the pressure: Earlier this week, JetBlue Airways Corp. slashed fares by as much as 50 percent on its routes, and several low-cost airlines announced fall fare cuts.
The fares have dropped faster than the ability of many airlines to cut costs and eliminate unprofitable routes.
"The legacy carriers' costs have caught up with them. It's a major part of their problem," said airline expert Aaron Gellman, professor of management and strategy at Northwestern University.
A recent rise in fuel prices has exacerbated problems. Fuel prices have reached nearly $38 a barrel this month, compared with about $20 a barrel in 2001, according to estimates from the Air Transport Association. That increase in fuel prices has cost the industry about $3 billion, the group said.
The fare cuts and rise in fuel bills have hit the low-cost airlines too. Yesterday, Southwest Airlines Inc., one of the industry's most profitable carriers, reported second-quarter earnings of $113 million in earnings, a 54 percent decline from the same period a year ago.
Southwest co-founder and Chairman Herbert D. Kelleher said although his airline has remained profitable while other carriers have reported consecutive quarterly losses, the industry has become more challenging. He described the current environment as the "most turbulent period in its recent history."
Yesterday, as part of its continued cost cutting, AMR Corp.'s American Airlines announced the furlough of 123 pilots, effective Oct. 1. Denis Breslin, the pilot union's committee chairman, said 2,470 of American's more than 13,000 pilots have been furloughed since the terrorist attacks.
US Airways Group Inc. also is making cuts. Just 16 months after emerging from Chapter 11 bankruptcy proceedings, the Arlington-based carrier wants its employees to agree to $800 million in new cost cuts by the end of September. That's part of the airline's effort to cut $1.5 billion in expenses it says it needs to avoid a second bankruptcy filing.
It's the third time US Airways has sought concessions from workers in three years. During the airline's bankruptcy last year, US Airways employees gave up $1.2 billion in pay and benefits.
Yesterday, the two unions that represent US Airways flight attendants, reservation agents and gate workers agreed to a new round of cost cuts, joining the pilots. US Airways still has not reached concession agreements with one of its largest and most influential unions, the machinists, which represents the airline's mechanics and fleet service workers.
Robert Roach Jr., general vice president of the International Association of Machinists, said airlines should focus on other ways to cut without targeting labor first. "The most important asset of an airline are the employees," Roach said. "They make sure people come back to the airline. If you demoralize them, then you cannot have a successful airline."
For travelers, that may mean longer waits at ticket counter lines and encountering workers who may be worrying about their future and increased job demands.
"It's stressful work, anyway. But to be constantly wondering is my pension going to be terminated, or is the airline going to survive, make it more difficult," said Patricia A. Friend, president of the Association of Flight Attendants, which represents workers at UAL Corp.'s United Airlines and US Airways.
Labor relations are strained at other airlines as carriers try to offset costs. Wednesday, United Airlines, which has been operating in Chapter 11 bankruptcy protection since December 2002, said it would put off making $72.4 million in payments to its employee pension funds to save cash as it tries to seek funding from investors to help it emerge from bankruptcy proceedings. United's $1.1 billion application for a federal loan guarantee was denied late last month, forcing the nation's second-largest carrier to look for interested private investors.
Since filing for bankruptcy protection, United has already cut about $5 billion of its costs, $2.5 billion coming from labor savings. But earlier this week, United executives cautioned workers that more cost-cutting lies ahead.
"We're looking across the company at everything we do, because we've got a long way to go before we're really cost-competitive," Peter D. McDonald, United's chief operating officer, said in a recorded message to employees.
Delta Air Lines Inc. announced earlier this week that it would take $1.65 billion in non-cash charges related to its deferred income taxes. It is trying to obtain about $850 million in concessions from its pilots, its highest-paid -- and only unionized -- employee group. Delta, the nation's third-largest carrier, has been struggling to cut costs and in recent months has hired bankruptcy consultants to help the carrier prepare for a possible filing.
Northwest Airlines Corp. is trying to cut its annual labor costs by $950 million. The airline is currently in talks with its pilots union. Northwest has already cut about $1.6 billion of its costs through various operational changes such as parking older planes and eliminating less popular routes following the terrorist attacks.
Standard & Poor's analyst Philip Baggaley said the airlines are trying to negotiate now with employees during what is traditionally a strong period for the carriers rather than wait until the fall and winter, when travel demand traditionally declines.
If Delta, United, US Airways and Northwest are successful in cutting their costs, other carriers may also be forced to slash further to remain competitive.
During the past two years, American has cut $4 billion, including $1.8 billion from its workers. But Daniel P. Garton, American's executive vice president of marketing, said the world's largest airline might have to revisit its cost-cutting to remain competitive.
"If someone gets a significant cost advantage like the low-cost carriers have, we will have to address our costs," Garton said.
Garton said there simply may be too many airlines competing for the same passengers. In the past year, United and Delta have launched their own low-cost carriers, known as Ted and Song, respectively. Last month, Dulles-based Independence Air Inc. began service.
"There is a huge imbalance between supply and demand," Garton said.