"High fuel costs, low ticket prices put low-cost carriers in the red"

Tuesday, October 26, 2004

High fuel costs, low ticket prices put low-cost carriers in the red
By Dan Fitzpatrick
The Pittsburgh (PA) Post-Gazette


Two low-cost carriers providing a local alternative to bankrupt US Airways
are flirting with bankruptcy themselves, victims of rising fuel prices and
weak air fares.

ATA Airlines, which offers five flights a week to Chicago, and Independence
Air, flying eight times a day to Washington, D.C., both could run out of
cash in early 2005 if fuel prices stay high and ticket prices stay low,
according to airline analysts. 

Two other low-fare options at Pittsburgh International Airport -- America
West Airlines and AirTran Holdings Inc. -- are expected to lose money in the
third quarter, but not go into bankruptcy.

Few carriers are now free from the liquidity crisis spreading through the
airline industry, which has lost $23 billion since the terrorist attacks of
Sept. 11, 2001, and expects to lose another $6 billion in 2004. Airlines
were supposed to shake off their slump in the second half of this year, but
that was before oil prices hit $55 a barrel. 

Delta Air Lines, Northwest Airlines, American Airlines, Continental Airlines
all posted losses in the third quarter ending Sept. 30. 

Yesterday, a unit of American Express Co. agreed to provide Delta with up to
$600 million in financing -- if the cash-strapped airline persuades its
reluctant pilots to accept $1 billion in concessions.

Deltahas warned it will have to file for bankruptcy without the cuts. It has
also said it may still have to file for bankruptcy even with the cuts
because of its $20.6 billion in debt.

"You have a pandemic here sweeping the industry," said local airline analyst
Bill Lauer. "All these guys are getting strangled." 

Across the industry, the only big carrier making money consistently is
Southwest Airlines, which recorded a $119 million profit in the third
quarter. JetBlue Airways, an upstart competitor, is also expected to show a
third-quarter profit when it reports its numbers this week.

Allegheny County Airport Authority Director Kent George is trying to recruit
Southwest and JetBlue, along with discounters Spirit Airlines and Frontier
Airlines, and he hopes to land two of them within the next 18 months. 

US Airways, which is in the midst of its second trip through bankruptcy, is
reducing local flights by a third this fall.

"The carriers that get their costs under control are the carriers that will
survive," George said. "There is demand for air service in Pittsburgh and
that demand will be met by existing or new carriers." 

A big reason Southwest and JetBlue are making money -- other than their
single fleet types, more productive work rules and reliance on
point-to-point flying -- is a risky, expensive practice called "hedging,"
which uses large outlays of cash to lock in low fuel prices weeks, months
and years ahead of time. 

Southwest is hedged through the end of 2005, thereby mitigating the effect
of high prices. US Airways, by comparison, is only 32 percent hedged for the
second half of 2004 and 5 percent hedged for 2005 at $30 per barrel of
crude, making it much more vulnerable to price swings. Crude oil is now
priced at more than $50 a barrel. 

When US Airways filed for bankruptcy on Sept. 12, it assumed crude oil
prices would stay at $44 per barrel. For every dollar over that mount, it
loses $2 million a month and the hole it has to fill "only gets deeper," it
said in bankruptcy documents.

UBS Securities airline analyst Robert Ashcroft gives Independence a 65
percent chance of filing for bankruptcy by January, when an estimated $60-70
million in aircraft rent payments come due. Its business plan, retooled when
it became a stand-alone carrier this summer and shed its regional roots,
assumed oil prices would stay at $30 a barrel; the current prices could
increase its expenses by $100 million a year. 

The airline, based at Washington Dulles International Airport, is competing
head-to-head with US Airways and Delta on major routes by offering fares as
low as $29. Even so, its 50-seat planes are not filling to capacity; the
carrier sold only 45 percent of its seats in September. (George said 74
percent of the seats have been filled so far this month on flights from
Pittsburgh to Dulles.) 

"It is clear to us that [Independence Air's] business plan isn't working,"
Ashcroft said in a recent report.

The other discount flyer on the ropes is ATA, the third-largest low-fare
carrier behind Dallas-based Southwest and Phoenix-based America West. 

ATA's problems -- and its $90.7 million in losses through the first half of
2004 --are worse due to the high oil prices and several hurricanes that
disrupted transportation in Florida.

ATA and Independence Air are "in the same boat," Lauer said, and the
"situation could wind up being terribly troubling should fuel prices remain
at these levels." 

Despite the problems of ATA and Independence Air, neither has retreated at
Pittsburgh International or announced a drop in flights, George said. But,
he added, "we are watching every single one of them and we are trying to
work with them in every way we can, just as we are trying to work with US
Airways."


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