=20 ---------------------------------------------------------------------- This article was sent to you by someone who found it on SFGate. The original article can be found on SFGate.com here: http://www.sfgate.com/cgi-bin/article.cgi?file=3D/news/archive/2004/08/11/f= inancial1115EDT0072.DTL --------------------------------------------------------------------- Wednesday, August 11, 2004 (AP) Airline fares are cheap, but service is faltering SCOTT MCCARTNEY, The Wall Street Journal (08-11) 08:15 PDT (AP) -- If this is as good as it gets for airlines, it's going to be a long, cold winter. The second quarter is historically the strongest period of the year for airlines as travelers take summer trips. But this year -- even though planes have been full -- their results were dismal. Five low-cost airlines earned a measly $150 million, only about a third what they earned a year earlier. Worse, six big network airlines posted combined quarterly net losses of $2.4 billion, far worse than last year's collective net loss of $150 million. Something has to give. The industry might be in for quite a bit of change this winter -- especially if oil prices stay in record-high territory above $40 a barrel. Airlines have been hit with huge increases in fuel costs, and yet they haven't able to raise prices. "The business doesn't work today," says Larry Kellner, Continental Airlines president. His boss, Gordon M. Bethune, is even more forthright: "We're all testing who can stay in the pool the longest." You can say this for the airlines: They sure can tread water. They tally billions of dollars in losses and still manage to keep flying. That's good news for consumers, at least in the short run, because it yields cheaper tickets. This fall and winter certainly look like bargain-basement season for airfares. Higher-cost airlines match prices of low-cost discounters, even when they can't afford to, and airlines of all stripes launch fare sales to fill empty seats. There's too much capacity in the skies for airlines to raise their prices, so unless a bunch of planes get grounded, the sales will continue. Already, airlines are drastically discounting fall travel. This summer I paid $250 for nonstop flights from Dallas to Raleigh-Durham, N.C., and back, and I have been watching fares to repeat the trip this fall. Last week, the price for my October itinerary fell to $177 round trip. AMR Corp.'s American Airlines recently tried to tack on a small $5-per-flight fare increase, but had to undo it because other carriers didn't match. Shortly after that, UAL Corp.'s United Airlines launched a big fare sale -- even as oil prices rose. In the long run, the benefits for consumers of these pricing bloodbaths are debatable. We need a healthy airline industry -- profits fund growth and improvements. If the industry is to improve its financial footing, weaker companies have to fall by the wayside, taking capacity out so that prices can line up with actual costs. Don't expect change overnight. Despite staggering losses of $8.9 billion during the past 3 1/2 years, United still hasn't even come up with a reorganization plan even though it filed for bankruptcy protection 20 months ago. (Just last week, United asked for another deadline extension.) Delta Air Lines, trying to avoid bankruptcy, says it needs pay cuts from its pilots this fall, or it will have to turn over its affairs to the authority of a federal judge. US Airways says it needs to come up with a turnaround plan by the end of September or it may be back in bankruptcy-court protection. Revenue doesn't need to change dramatically for some carriers to turn a profit. Continental will spend $500 million more on fuel this year, but that's only about 5 percent of annual revenue, Mr. Kellner notes. A 5 percent fare increase would help airlines tremendously. In the second quarter, Delta paid nearly 9 percent more than American did to fly one seat one mile. Labor accounted for about a quarter of the difference, which explains why Delta wants pilot concessions. But labor doesn't cover the whole thing. The airline is reviewing its operations this summer: Expect Delta to shrink in some areas and try to bolster others. The industry is betting Delta can't keep trying to operate a hub in Dallas across the tarmac from American's giant operation. US Airways, too, is changing. It's abandoning Pittsburgh as a hub and trying to win more concessions from employees. The carrier warned it may default on its government-guaranteed loan and may wind up back in bankruptcy renegotiation. US Airways' unit costs -- how much it spends to move one seat one mile -- were 38 percent higher than Southwest Airlines' during the second quarter. US Airways may match Southwest fares in Philadelphia, US Airways' top revenue-generating hub, but one company can earn profits at those fare levels and one can't. It's unclear whether US Airways could find investors to throw more money into the airline to give it another try. United faces much the same problem. It has an unfunded pension liability of $5.9 billion, and unless it cancels those pensions, it likely can't find investors to give it new money to pay old bills. Canceling the pensions, perhaps to replace them with a 401(k) program, will bring a bloody union battle. Of course, all these problems have been brewing for years in the airline industry. What's different now is that high oil prices are really starting to strain carriers, stepping up the urgency to fix the problems. "Because the current level of industry losses are not sustainable, some sort of shakeout must occur," says Glenn Engel, airline analyst at Goldman Sachs. "But weaker airlines have always been able to linger for far longer than expected, and in the current industry war of attrition, everyone is likely to go hungry." ---------------------------------------------------------------------- Copyright 2004 AP