More turbulence ahead

Like poker players dealt a bad hand, they’re trying to act calm, but $100-plus oil is starting to really scare the people who run the United States’ airlines.

Record prices for both crude oil and refined jet fuel are threatening to send U.S. carriers spiraling toward deep losses, drastic service cutbacks, job cuts and, perhaps by year’s end, an industrywide cash crunch.

A year ago, airline managers were talking about the return of a profits cycle in 2007 that would grow larger this year and extend into 2009 or even 2010. Now, they’re grounding and selling planes, trimming service on marginal routes and eliminating it on others where there’s no hope of making money. They are cutting jobs, rolling out more service charges and – to the consternation of travelers - raising fares almost weekly by amounts never seen before. They’re also watching their cash balances closely – and nervously.

Prolonged oil prices above $110 a barrel could do what all the airlines’ long list of problems in the last seven years have not – drive one or more out of business. That’s a worst-case scenario, however. The government’s Energy Information Administration forecasts crude oil prices will average $94 a barrel. And airlines have a well-established record of surviving the most horrible business conditions.

But even if expectations of prolonged triple-digit oil prices prove wrong, no one expects them to fall back near last year’s painfully high average of $72 a barrel. So U.S. carriers are certain to spend much more on fuel this year than they did last year – $2 billion more in Delta’s case at current oil prices, for example.

That means U.S. air carriers appear headed toward the kind of huge losses they rang up in the post-Sept. 11 years before earning very modest profits in 2006 and 2007. In recent reports, several industry analysts have projected those losses could range from $1 billion to $9 billion.

“Something’s gotta give somewhere,” says Joe Hodas, a spokesman for Frontier Airlines.

A small, Denver-based discounter, Frontier is squeezed not only by fuel prices but also by competition from United and Southwest at its Denver hub.

Low-cost carriers such as Frontier are perhaps most threatened by high oil prices because fuel represents a bigger share of operating budgets, and because they have fewer assets they can turn into cash for survival. But Hodas says triple-digit oil prices are a threat to all carriers. “None of us can sustain $110-a-barrel oil long term; none of us, I don’t think,” he says. “Whether it’s consolidation or the shrinking of capacity, you’re going to see more of that (as airlines) deal with these fuel prices.”

Analyst Michael Derchin at FTN Midwest Securities says airlines are entering “another Darwinian period of survival of the fittest.” Not only must capacity be reduced, “Fares will have to be a lot higher,” he says. And fuel surcharges like those now in place on most international tickets sold must be “adopted domestically as part of the pricing system.”

That’s already happening. There have been at least seven successful major fare increases this year involving the big network carriers. Eleven days ago, United led the industry in tacking up to $50 to the round-trip price of domestic tickets, a huge price increase by airline standards in any era. Five days later Delta followed with a $10 boost to domestic fares, and American and Northwest added $20 to most trans-Atlantic fares.

To reduce their exposure to high fuel prices, Frontier, JetBlue and AirTran are selling some of their new planes. ATA Airlines, once the dominant discounter at Chicago’s Midway Airport, is shutting down scheduled flying except for its West Coast-to-Hawaii flights. It will concentrate on charter service, where it’s easier to pass higher oil prices on to the customer.

“The high cost of fuel and the fact that it stayed high were overbearing,” says Steve Forsyth, spokesman for ATA’s parent, Global Aero Logistics.

Even Skybus, the tiny year-old discounter that offers a few seats on all its flights for $10 one way, is reducing flights and scaling back its growth plans in the face of high oil prices.

Oil prices’ rise this year is no surprise. U.S. carriers paid an average $2.10 a gallon for jet fuel last year, according to their trade group, the Air Transport Association. That equates to about $72 a barrel for crude oil, and to $88.28 a barrel for refined jet fuel. Most carriers had budgeted for crude oil prices of $85 to $90 a barrel this year.