Summer travel headaches loom as airlines' woes continue to deepen

Wednesday, April 23, 2008

CHICAGO — Soaring fuel costs. Flights cut. Jobs lost.

The parent company of United Airlines reported a worse-than-expected quarterly loss Tuesday, citing a string of problems that are hurting other carriers as well. And for travelers, a vacation season of jammed planes, delayed flights and higher fares looms in what's shaping up as the worst of times for both airlines and their customers.

"It's going to be a rough summer," said Terry Trippler, a Minneapolis-based travel expert. "It's going to be one where you've got to plan another day into your travel schedule" just to prepare for schedule chaos.

Months of rising concerns about the consequences of higher fuel prices jumped to new levels of anxiety among investors on a gloomy combination of developments that sent UAL Corp. shares down a staggering 35 percent and battered other airline stocks.

Not only did United post a $537 million first-quarter loss and announce cutbacks accordingly, crude oil surged near the once-unthinkable $120-a-barrel mark and Delta Air Lines Inc. chief executive officer Richard Anderson said domestic carriers would need to raise fares by 15 percent to 20 percent just to break even.

With weaker demand because of the economy, cutbacks in corporate travel and likely "sticker shock" among consumers, it's not clear whether the airlines can accomplish such increases. Airlines have already succeeded in raising ticket prices eight times this year across most of their route networks, with four other attempts rolled back after competitors refused to join in.

Anderson said higher fares would likely diminish demand for air travel, and prompt carriers to further reduce their schedules.

"We've got an industry that's in trouble," said Vaughn Cordle, chief executive and chief analyst at AirlineForecasts in Washington. "If oil prices stay anywhere near $100, $120 for the year ... we'll have a massive restructuring of the airline industry."

It's time for passengers, too, to buckle up for a rough ride as the heavy travel season approaches. Planes will be fuller and ticket prices significantly higher than in past summers.

Just how bad cancellations and delays will be is hard to predict. Airlines' recent cutbacks and the shutdowns of a handful of smaller carriers will remove some planes from the skies but won't solve congestion, and the threat of weather problems and labor strife is ever-present.

Passengers have had a taste of the possible pandemonium already this year after massive flight cancellations by American Airlines and the Federal Aviation Administration stepping up its scrutiny of airplane inspections after years of more lenient enforcement.

The good news, relatively speaking: Americans may already be steeled to these types of stressful conditions.

"It's not like this has come out of the blue," Trippler said. "It's getting progressively worse every year. But most summer air travelers are experienced."

So far, they're also determined to go regardless of ticket markups. Airlines have said their bookings still look strong, given the iffy economic situation.

Arthur Salus, president of Duluth (Ga.) Travel outside Atlanta, said demand remains strong for both domestic and international travel. After all, sky-high gasoline costs don't look great by comparison, either.

"People still have the money and they still want to travel," he said. "If someone pays $20, $30, $40 more for a ticket, that's not going to be a deterrent for them if they have to drive more than four to five hours."

Eventually, though, both the airlines and analysts expect business to drop off as fares keep rising.

The likeliest price increases are in markets where companies do not compete head-to-head with budget carriers like Southwest Airlines Co. or face little competition from other traditional airlines. During the first week of April, for example, leisure fares from traditional carriers on 280 major routes rose 13 percent from the previous year, according to data compiled by travel research firm Harrell Associates.

But prices to several smaller cities served by fewer flights rose substantially more. Prices between New York and Pittsburgh, for example, doubled to $68 one-way, while a ticket from Newark, N.J., to Cleveland rose 80 percent to $124, according to the data.

For United, as with other carriers, higher fares are only part of the response to what it called an "extraordinarily difficult" operating environment that worsened Tuesday with crude prices rising another $1.89 to a record $119.37.

The nation's second-largest airline said its revenue growth of nearly 8 percent was more than offset by a $618 million jump in fuel costs, which rose nearly 50 percent in a year.

After reporting its biggest loss since emerging from bankruptcy in 2006, the Chicago-based carrier said it will trim 2008 spending by $400 million, eliminate 1,100 jobs by the end of the year, cut domestic capacity 9 percent by the fourth quarter and ground 30 of its oldest and least-efficient aircraft.

"The path to sustainable profitability requires us to fundamentally overhaul every facet of our business," said Glenn Tilton, United's chairman, president and CEO. "The pressure of high energy prices and a weakening economy are a wake-up call that the pace of change must accelerate."

Combining with another carrier could be next, especially in the wake of the proposed tie-up this month of Delta and Northwest Airlines Corp. While Tilton did not name Continental, United is known to be in talks with the Houston-based carrier. Consolidation, the CEO said, is "one of the changes required to address the gap between where we stand today and profitability and sustainability."

United follows American Airlines parent AMR Corp. and Continental Airlines Inc. into the red for the quarter because of fuel costs. Southwest is the only large carrier to have reported a profit so far.

Among smaller carriers, JetBlue Airways Corp. reported an $8 million loss Tuesday that was narrower than expected. CEO Dave Barger said on a conference call that its $138 average fare in March was its highest monthly average ever. But the New York-based airline said fares would have had to have been 2 percent higher for it to have made a profit in the quarter.

AirTran Holdings Inc. also swung to a $34.8 million loss on hefty fuel costs.

The record fuel prices make it virtually impossible for a low-cost startup airline to enter the market for the time being.

Calyon Securities airline analyst Ray Neidl said carriers will need to continue cutting back on flights and raising prices in order to cope with higher oil prices.

"We've got too much capacity and prices are too low," he said. "Airlines just can't survive with the current air fares if oil stays this high."

Neidl said he expects airlines will continue to find ways to charge for added services, such as extra bags and more legroom. But that trend, he said, would be happening even without the surge in fuel costs.

"People do want to pay the rock-bottom fare and not have to subsidize other services," he said.

High oil prices and the global credit squeeze also are affecting demand for new planes. While airlines can still negotiate substantial discounts, European planemaker Airbus said Tuesday that the ever-weaker dollar and high metals prices are forcing it to raise prices. Airbus announced increases of as much as 3 percent to catalog prices — on top of the 2.74 percent annual hike for 2007 already programmed.

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Associated Press Writers Dan Caterinicchia in Washington, Emma Vandore in Paris, Adam Schreck and John Wilen in New York and Megan K. Scott in New York contributed to this report.

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On the Net:

www.united.com

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