Low Cost Carriers To Survive


Dec 11, 2002
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Posted on Wed, Dec. 08, 2004


Oil, labor costs take air carriers off course


Dallas Morning News

If energy prices weren't so high, the airline industry's earnings would be at altitudes not seen since the Internet bubble days. But planes need fuel, and crude oil prices, despite a recent drop, remain above $40 a barrel.

Two reports released Tuesday suggest that despite aggressive cost-cutting efforts and an improving economy, the airline sector will continue to struggle next year.

Call it a "profitless recovery," wrote Merrill Lynch analyst Michael Linenberg.

Collectively, carriers will lose $5 billion in 2004. Nearly a fifth of the loss will come at American Airlines Inc., according to Wall Street estimates.

After three years of staggering losses following the Sept. 11 terror attacks, the industry had hoped for better days in 2005.

But those hopes have been tempered, both by high fuel prices and by intense competition that has held back the ability of carriers to raise fares.

"We're in a permanent low-fare environment," said Southwest Airlines Co. chief executive Gary Kelly, speaking at a forum in Dallas last month. Fares, he said, will continue to drop as his airline and others expand nationwide.

Only Southwest and low-cost JetBlue Airways Corp. have been able to turn consistent profits even with high oil prices.

"Over the next couple of years, the only carriers that are going to survive are going to be low-cost carriers," he said.

In his report Tuesday, Lehman Bros. analyst Gary Chase downgraded most of the industry's big names, writing that "we can no longer be confident that there will be meaningfully more 'up' in this cycle."

He predicted only tiny profit improvement next year.

"Investors should recall that the industry, excluding fuel, is generating as much operating profitability as it was in the boom years of the late 1990s," Chase wrote.

Fewer airlines competing for passengers would help, some analysts say.

Now even the prospect of a liquidation of US Airways Inc. is softening as the carrier has asked a federal judge to throw out its labor contracts so it can dramatically reshape its costs.

"They've got their pilots on board, and lower jet fuel prices have helped a bit," said analyst Ray Neidl of Calyon Securities Inc. in New York. If US Airways can survive what's predicted to be a brutal showdown with its labor unions over contracts in coming months, Chase believes the bankrupt carrier can stay in the game.

That extra capacity would mean more rock-bottom pricing for East Coast flights, further depressing revenue.

For American, the survival strategy remains the same: continue to whittle costs and smartly deploy its planes where they'll rake in the most money.

That means less flying against low-cost foes such as JetBlue and much more international flying, where average fares measured over distances remain strong, at least for now.

Shares didn't move much on the downbeat research Tuesday, following gains last week as crude prices fell back.

American parent AMR Corp. shares rose a penny to $10.21. Southwest shares fell 11 cents to $15.73. Continental shares rose 9 cents to $12.21.