January 19, 2008 in Business

Turbulent ‘08 awaits airlines

Los Angeles Times The Spokesman-Review
 

Record fuel prices and weakening demand for air travel have began to eat into big airline profits, raising prospects of airline industry consolidation in 2008.

Recent merger talks and Thursday’s announcement by American Airlines that it would double its fuel charge to $40 for a round-trip ticket signaled that consumers could soon see industrywide price increases.

After years of failed attempts and false starts, some analysts say high fuel costs, increased competition from low-cost carriers and a slumping economy are creating a year ripe for mergers among large U.S. airlines.

American Airlines, the nation’s largest carrier, posted a loss in the fourth quarter because of record fuel prices and weather-related service disruptions. Similar results are expected for other major airlines after six consecutive quarters of profits.

But while airline executives and investors would gain from the mergers, the flying public would likely be left grounded with higher air fares and further cutbacks in declining service and flights.

“Customers will lose because they always lose in a merger,” said Joe Brancatelli, who runs a Web site for business travelers, joesentme.com. “I don’t care what they say, mergers have been bad for customers.”

The latest merger mania got a jump start last week when shares of Delta Air Lines Inc. soared on reports that it was looking at combining either with United Airlines parent UAL Inc. or Northwest Airlines to create the nation’s largest carrier.

“It’s likely that we will have a reduction in the number of large carriers,” said George Hamlin, managing director of ACA Associates, an aviation consulting company. “We’ve had several airline executives saying there are too many carriers and too much capacity with higher fuel costs exacerbating the situation.”

But while Wall Street and airlines are clamoring for consolidation, federal regulators and Congress may block mergers on anti-competitive concerns though some analysts contend they may be less resistant than in the past.

Calls for consolidation have grown as the industry faces declining travel demand with fears of recession and signs that fuel prices are likely to remain high.

At the same time, low-cost and regional airlines have been stepping up competition in markets that the major carriers have typically dominated. On Wednesday, Alaska Airlines said that in April it would increase flights from Los Angeles International Airport to Seattle from 12 a day to 15. Last week, Southwest Airlines said it would add six flights from Los Angeles to Denver, a major hub for United Airlines.

In doubling the fuel charge, American said its fuel costs rose nearly 30 percent in the fourth quarter, with fuel accounting for a third of the airline’s expenses.

Rick Seaney, chief executive of FareCompare.com, which tracks fuel surcharges, said other airlines are likely to match the higher fuel surcharge, possibly as soon as this weekend.


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