Turbulence remains

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 ago.

While a few highly efficient carriers such as Southwest Airlines Co. and JetBlue Airways Corp. remain 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 the year, 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 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.

Analysts expect carriers to retrench from certain markets, as Delta and US Airways did this year in Dallas and Pittsburgh, to focus on fewer, select cities where they stand the best chance of growing.

Other cost-cutting strategies include speeding up the time it takes to offload arriving passengers so the next flight is ready for takeoff sooner, 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 that as the loyalty of air travelers shifts from a particular airline to the cheapest available tickets, it becomes even more important to focus on consistently good customer service, an area where Southwest and JetBlue excel.

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

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