"Airlines to Battle High Costs in 2005"

Tuesday, December 21, 2004

Airlines to Battle High Costs in 2005
Distressed Airline Industry Will Have to Battle High Fuel and Labor Costs in
2005
The Associated Press


Jet fuel prices are high. Airfares are low. And the biggest carriers are
wrangling with employees over pay, benefits and productivity. 

The airline industry is in as much financial distress at the end of 2004 as
it was a year earlier. 

While a few highly efficient carriers such as Southwest Airlines Co. and
JetBlue Airways Corp. are profitable, the bulk of the industry is losing
money, with little hope of turning that trend around in the coming year
despite rising demand for air travel. 

"None of the legacy carriers are expected to be profitable next year,"
Standard & Poor's airline analyst Philip Baggaley said, referring to the
nation's biggest airlines, other than Southwest, that existed before
industry deregulation in 1978.

One of the biggest problems for U.S. carriers, which lost more than $5
billion over the first nine months of 2004, is that, despite a recent drop
in oil prices, the cost of jet fuel is up sharply from a year ago. 

The airlines are trying to keep fuel expenses down any way they can tanking
up in cities where it is cheap, taxiing with one engine and even lightening
the amount they carry in reserve in the event of an emergency. But the
industry's second-largest expense after labor is largely beyond control. 

By comparison, the industry has considerable power over the direction of
labor expenses, and that is where executives are likely to focus their
attention in 2005. 

UAL Corp.'s United Airlines and US Airways Group Inc. are negotiating wage
and benefits' concessions with workers under bankruptcy court protection,
while Delta Air Lines Inc., which recently won $1 billion in annual cuts
from its pilots, is hoping to avoid Chapter 11. 

Rivals in better financial health such as Northwest Airlines Corp. and
Continental Airlines Inc. are under pressure to squeeze more out of their
own workers, though their relative strength or weakness is not entirely
clear yet. 

"We have some 35 percent of our industry in bankruptcy right now that means
we have to watch and see how those carriers emerge or don't emerge," said W.
Douglas Parker, CEO of America West Holdings Corp. 

"I don't anticipate we'll see a large liquidation of capacity, but clearly
that's in the realm of possibility," Parker said. With less capacity in the
system, Parker and other executives believe it will be easier to raise
leisure ticket prices, which are nearly 20 percent cheaper than a year ago. 

In the meantime, the basic goal of struggling airlines will be to reduce
operating costs to levels comparable to those at JetBlue, Southwest and
AirTran Holdings Inc.'s AirTran Airways. 

"They have to rapidly evolve or perish," said Calyon Securities airline
analyst Ray Neidl. 

The cheap fares offered by budget airlines, which now control more than 25
percent of the market, have become the standard by which a growing number of
fliers comparison shop. That will force American, United and Delta to keep
some of their tickets priced at unprofitable levels on many routes to stay
competitive. 

The biggest airlines' cost per available seat mile the expense of flying one
customer one mile is as much as 30 percent higher than those of Southwest.
Closing the gap will require "using human and physical assets more
efficiently," said Phil Roberts, managing partner of the transportation
consultancy Unisys R2A in Oakland, Calif. 

Analysts expect carriers to retrench from certain markets, as Delta and US
Airways did in 2004 in Dallas and Pittsburgh, respectively, to focus on
fewer, select cities where they stand the best chance of growing. They are
also likely to curtail previous expansion plans, as American, United and
others have done. And they will try any way they can to utilize aircraft and
employees better. 

For example, Frontier Airlines pilots recently switched from a fixed monthly
salary to an hourly pay system, a move the company expects will increase
pilots' productivity next year by giving them the financial incentive to fly
more. 

Other cost-cutting strategies include: speeding up the time it takes to
offload arriving passengers so the next flight is ready for takeoff quicker
and trying to break down boundaries between work groups so an employee who
checks in passengers can also load baggage onto an aircraft. 

"Work rules are the key thing in my mind that's going to help some of these
carriers," said Steve Hendrickson, senior partner at Sabre Holdings Corp.'s
airline consulting division. 

But executives say just having low costs and prices won't cut it long term,
since that is the baseline of what investors and travelers now expect. 

As the loyalty of air travelers shifts more to the cheapest available ticket
than any particular airline, executives say it becomes even more important
to focus on consistently good customer service, an area where Southwest and
JetBlue excel, whether it's by providing new planes, quirky flight
attendants, a TV behind every chair or just a bag of peanuts. 

"We cannot let ourselves be convinced that we operate in a true commodity
business," Frontier Airlines CEO Jeff Potter said.


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