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Airlines Brace for Tough Year By Brad Foss - Associated Press WASHINGTON - A steady rise in travel demand notwithstanding, the airline industry's financial outlook is wobbly again, with losses in 2004 now expected to surpass $2 billion -- about four times analysts' earlier estimates. Shares of several large airlines fell Tuesday as investors braced for the release of March traffic and revenue data later this week. Major carriers such as American and United are struggling on many fronts: expensive jet fuel, fierce competition from budget carriers and tight-fistedness from formerly high-paying business travelers. Delta and US Airways face the additional challenge of seeking steep pay cuts from employees. About the best thing the U.S. airline industry can say for itself right now is that losses are narrowing on a year-to-year basis. Wall Street analysts are predicting 2004 losses of $2.2 billion to $2.3 billion. That's better than last year's industrywide loss of about $6 billion, but worse than analysts' earlier expectations of red ink totaling $500 million to $600 million. ``The only way out of this problem is for costs to go down,'' said Thom Nulty, partner in the Corporate Solutions Group, a Monarch Beach airline consultancy. That's because the rapid expansion of budget carriers such as Southwest, JetBlue and AirTran, which account for about one-fourth of all domestic flights, has made it extremely difficult for major carriers to increase their revenue. Major carriers have been matching the low-cost airlines' fares on routes where they compete, although analysts say this is not a viable long-term strategy because the majors cannot profit at these price levels. ``U.S. carriers won't survive for long if they don't aggressively reduce their costs and get out of businesses they shouldn't be in,'' said Michael Dyment, an expert in low-cost operations at SH&E, an aviation consulting group. To defend their dwindling market share, major carriers have been increasing capacity, hoping that more frequent flights will appeal to travelers seeking convenience. In February, domestic available seat miles -- a measure of the industry's carrying capacity -- rose 9.4 percent, while passenger traffic grew 10 percent, according to the Air Transport Association. It was the seventh month in a row that revenue passenger miles -- a measure of demand -- had increased. Analysts say airlines are adding capacity too quickly, though, putting additional downward pressure on ticket prices. The average one-way domestic fare in 2003 was $276, compared with $311 in 2000, the highest level in the past decade, according to data published by American Express. Stingy corporate travelers are a significant force pushing average ticket prices lower, according to American Express, whose data shows that in 2003 business travelers bought tickets that cost 51 percent less than the average listed price for business fares. Fuel is the industry's second-biggest cost after labor and, according to Blaylock & Partners airline analyst Ray Neidl, each $1 increase in the price of oil translates into $425 million in additional costs for carriers. Delta said more than 10 percent of its expected $400 million loss in the first quarter of 2004 will be tied to fuel costs. Delta, which is facing stiff competition from AirTran, has been trying to persuade its pilots to accept a 30 percent pay cut. The pilots have offered a cut of 9 percent. Phil Roberts, managing partner of the transportation consultancy Unisys
R2A, said reducing costs to break-even levels will require dramatic changes,
including cutting back on meal services and frequent flier programs.
© 1997-2007, SH&E, an ICF International Company
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