American Airlines is markedly cutting capacity, reducing its workforce, matching or initiating airfare hikes and raising fees--including a $15 charge for a passenger's first checked bag. Such moves no longer are surprising as airlines all year have been attempting to mitigate the skyrocketing cost of jet fuel. But an AA executive speaking last week at a corporate travel conference and industry analysts in recent research notes detailed just how dire a situation carriers face in an effort to survive the current oil price calamity--considered by some as already more damaging to airlines than the 9/11 attacks.
The ramifications of the deepening crisis for corporate travel programs and business travelers--at least the ones still traveling--likely will range from higher travel costs to fewer flight options and even more crowded planes.
"I have never seen people as worried about the future as they are today," said Will Ris, American Airlines senior vice president of government affairs, speaking this month in Washington, D.C., during an Association of Corporate Travel Executives conference. "From the beginning of deregulation to the first day of this calendar year, on average our industry lost $1.76 for every passenger that we've flown. This year, however, as an industry, we are losing $10.89 per passenger. American Airlines is losing $3 million a day, and we're doing better than a lot of the other guys. This is not a good business formula."
If fuel prices don't retreat substantially, more U.S. airline Chapter 11 filings will be necessary--in addition to the half dozen already this year--especially with demand showing signs of weakening, according to analysts. UBS analyst Kevin Crissey last week "sharply" adjusted downward his earnings estimates for U.S. carriers, with larger financial losses expected than previously.
"We view the value of the stocks as primarily coming from the chance that fuel prices plummet before the carriers must seek bankruptcy court protection," Crissey wrote. "This is certainly one possible outcome, but we are not holding out much hope."
JPMorgan analyst Jamie Baker now estimates that 2008 industry losses will reach "an all-time record" of $7.2 billion. "We are introducing a 2009 industry operating loss estimate of $8.1 billion," he added. "At current fuel prices, legacy [airline] bankruptcies and/or merge-at-all-cost attempts are a question of when, not if." JPMorgan ascribed the highest risk of bankruptcy among major U.S. airlines to US Airways, followed in order by Northwest, United and American.
At the start of trading on Thursday--with crude oil prices above $131 per barrel on the New York Mercantile Exchange--the stock prices of AirTran, Delta, US Airways and Northwest were each less than half of what they were on Jan. 2. United's stock dropped from nearly 32 cents to just under 8 cents. Share prices for Alaska, American, Continental and JetBlue also were lower. Among major U.S. carriers, only Southwest's stock is higher now than at the beginning of this year.
Putting the fuel challenge in perspective, AMR paid $665 million more for fuel in this year's first quarter than in last year's. And since April 16, it said, the price of jet fuel jumped 10 percent. "It's the only cost that we are absolutely powerless to do anything about," Ris told ACTE conference delegates.
Ris also explained that the airline industry from 2000 to 2003 "was paying less than $40 a barrel for jet fuel. Today on the spot market, that price is $150." Add in the crack spread--the cost of converting crude to jet fuel, which in recent years has multiplied and now stands around $30 a barrel, Ris said--and jet fuel is now even more costly. Moreover, he added that a weak dollar means non-U.S. airlines are paying as much as $55 less per barrel than their U.S. counterparts.
"We either need to lower our costs or raise our prices, or do a combination of both. But we can't," Ris said. "There's virtually no fat left to cut."
One delegate who had listened to Ris speak said that he had "never seen him address this in such a passionate way ... He's worried. We all should be worried."
Survival Strategies
Unlike most of its primary competitors, AA parent AMR Corp. has avoided bankruptcy. To stay clear of the courts, the company last week announced several initiatives, including the $15 fee for a passenger's first checked bag, effective June 15.
Passengers exempt from the fee include most international travelers; those who purchased a first class, business class or full-fare economy ticket; those with elite level status in the carrier's (or the oneworld alliance's) loyalty program; and those flying on an AAirpass ticket. All other travelers needing to check a bag will be charged; few, if any, corporations will likely succeed in negotiating away the fee, which doubtlessly will create some initial confusion and a degree of inefficiency for airport operations.
Thus far, none of AA's competitors has matched, effectively creating a price differential between carriers competing on the same route.
AA previously matched a second bag fee of $25 first announced by United Airlines.
Other AA fee modifications include ticket change fees--which increased $50 for domestic tickets (to $150) and rose to between $150 and $250 for international tickets (from between $100 and $200)--similar to revised policies implemented by United. Airport service fees also went up, from $20 to $30, external reservation handling fees increased, from $15 to $20, and frequent flyer award ticket fees rose $5, to $20.
"I know that you and your customers are frustrated by the trend to charge for bags and reservation services and food and seat assignments and many other things," Ris told ACTE delegates. "But we have to look under every rock and crevice for every single dime we can."
AA also announced a domestic capacity reduction that by the fourth quarter would result in the carrier flying 11 percent or 12 percent fewer mainline seat miles and 10 percent to 11 percent fewer regional seat miles than a year earlier. That includes plans to retire 75 mainline and regional aircraft. AMR chairman and CEO Gerard Arpey said the capacity reductions are aimed at cutting costs and creating "a more sustainable supply and demand balance in the market." They will lead to "workforce reductions" at mainline AA, as well as wholly owned regional operator American Eagle, and "could result in facility closures or facility consolidation."
American this week detailed "the first round" of capacity cuts, which include discontinuation of services between Chicago and Buenos Aires (effective Sept. 3), Chicago and Honolulu (Jan. 5, 2009), and Boston and San Diego (Sept. 3), as well as a "restructuring" of San Juan operations. AA on July 2 also will end service between New York JFK and London Stansted Airport, less than a year after launching flights on the route to compete against now defunct MaxJet Airways and Eos Airlines. In September 2007, AA's then-vice president of global sales David Cush described the service as "a perfect solution" for premium customers.
Since last year, several major U.S. carriers have announced deeper domestic capacity reductions. United, for example, in April said its 2008 capacity would be down 9 percent and now wants to postpone by one year its planned June launch of San Francisco-Guangzhou service, according to the Associated Press. Similarly, US Airways wants to delay the start of Philadelphia-Beijing flights, APreported.
Meanwhile, Delta's planned domestic capacity cut for the second half of the year is 10 percent, and JetBlue this week said it is deferring 21 aircraft deliveries that originally were scheduled to begin next year to "further moderate our growth rate."
Despite such announcements--which likely will have a trickle-down impact on hotels, restaurants and others in the travel and tourism industry--more cuts are needed for the industry to attain sustainability, analysts assert.
"We estimate the industry needs to shrink close to 20 percent in order to recalibrate for current fuel prices," according to JPMorgan's Baker. "So far, 2008 capacity is expected [at] negative 2 percent. If it sounds like we're panicking, it's because few managements appear to be. When challenged, several managements now concede that business plans rest on little more than [outlasting competitors]."
In addition to slashing capacity, airlines continue raising fares. Major airlines this past weekend matched a United Airlines fare hike that raised walk-up fares by as much as $60 roundtrip based on flight distance, according to price watchers. Tom Parsons of BestFares.com noted that "travelers flying between two noncompetitive markets over 1,500 air miles [on routes not served by AirTran, Frontier, JetBlue, Southwest, Spirit or Virgin America] now pay $340 roundtrip more than they did on Dec. 20, 2007." FareCompare's Rick Seaney this weekend reported that "American Airlines also increased what appears to be mostly Southwest overlap routes by $6 to $8 roundtrip."