Posted on Wed, Oct. 20, 2004
Fuel prices, low fares crush airlines' hopes
As the year began, the major carriers thought the 2d half would mark an end to 3 years of losses. They were wrong.
By Tom Belden
Inquirer Staff Writer
When 2004 dawned, the outlook for the major airlines was upbeat, full of hope that at least the second half would be the end of three dismal years of losses.
But the release of airlines' third-quarter results this week reveals just how far off the forecasts were, with high fuel prices and travelers' demands for low fares swamping virtually every carrier in red ink.
"Another grim quarter," analyst Jamie Baker of J.P. Morgan Securities Inc. in New York warned investors in a report earlier this month.
Baker estimated that U.S. carriers would lose $1.2 billion in the three months ended Sept. 30, a figure many other Wall Street watchers agree with. Losses for the year could approach $6 billion, on top of the $23 billion drained away from 2001 through 2003, and that may not be the end of it, the analysts say.
"We're clearly seeing the impact of soaring fuel prices and a weak revenue environment," said analyst William T. Warlick of Fitch Ratings in Chicago. "Crude oil at $50-plus a barrel and the absence of pricing power... is contributing to a very gloomy outlook, and there's no reason to think 2005 will be any better."
Continental Airlines Inc. yesterday reported a third-quarter loss of $16 million, or 24 cents a share. Analysts anticipate that American Airlines' parent AMR Inc., Delta Air Lines Inc., and Northwest Airlines' parent NWA Inc. also will report losses today.
Even newer low-cost, low-fare airlines, including America West Holdings Corp., AirTran Holdings Inc. and ATA Airlines Inc., are expected to lose money.
Southwest Airlines Co. is the only exception among the big carriers. Thanks largely to its strategy of buying advance jet-fuel contracts that locked in lower prices, the Dallas-based discounter reported last week that it made $119 million in the third quarter.
Within weeks, half of the major-airline seats in the sky could be flown by carriers operating under Chapter 11 bankruptcy protection. The No. 7 carrier, US Airways Group Inc., filed for bankruptcy Sept. 12 for the second time in two years, and No. 2 United Airlines Inc. has been there since December 2002.
Next to retreat into Chapter 11, analysts say, will be Delta, the third-largest airline, once a consistently profitable company that has huge debts and the high labor costs that most older carriers have.
Analysts' forecasts early this year for a healthy recovery were based on oil's staying below about $35 a barrel - almost $20 less than recent crude prices. For each $1-a-barrel price increase, U.S. airlines have to shell out an additional $425 million for jet fuel, according to the Air Transport Association, the major carriers' trade group.
The airline industry's worst third quarters on record were in 2001 and 2002, but other factors were at work then, the analysts said.
Unlike those quarters, "both punctuated by 9/11 and its immediate aftermath, fuel is the primary culprit behind this year's loss," Baker, the J.P. Morgan analyst, said. "Had oil remained at year-ago third-quarter levels, the industry would have posted nearly a $200 million profit this quarter."
Pressure to keep fares low, caused mostly by the steady expansion of Southwest, AirTran, and other low-fare carriers, has been another big contributor to the losses, the analysts say.
The big airlines tried repeatedly in recent months to add $10 to the price of every one-way ticket to help offset their soaring fuel bills, but backed off when one or more competitors would not go along. Eventually, American succeeded in raising fares by $5 per one-way ticket, a move others matched.
The airlines' financial troubles have set up a situation that analysts and industry officials alike say is unsustainable and that cries out for fresh thinking about what to do about it. The nightmare scenario is that two or more bankrupt carriers shut down, leaving thousands of people unemployed in the travel industry and dozens of communities with little or no air service.
The Business Travel Coalition, the Radnor-based advocacy group for companies and travelers, called last week for Congress to develop policies that could be put in place should even more than three major airlines wind up in Bankruptcy Court. The group suggested that Congress could assign the task to the Transportation Research Board, a unit of the National Academy of Sciences.
Coalition chairman Kevin P. Mitchell said other airlines eventually may replace the service provided by failed carriers. But the danger is that a simultaneous collapse could lead to calls for another bailout of the industry - the government provided billions in loans and grants to airlines after the Sept. 11, 2001, terrorist attacks - or a return to regulation of fares and service, he said.
"Hopefully, the airline industry will avert a collapse," Mitchell said. "However, like airline executives, government policymakers would find themselves with few good choices in a time of crisis if no debate and planning occur until it is far too late."
