Airlines see steeper losses
By Brad Foss
Associated Press
WASHINGTON — A steady rise in travel demand notwithstanding, the airline industry's financial outlook is looking wobbly again, with losses in 2004 now expected to surpass $2 billion — about four times steeper than analysts' earlier estimates.
Shares of several large airlines fell yesterday 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, meanwhile, 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-over-year basis.
Wall Street analysts are predicting 2004 losses of $2.2 billion-$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-$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 California-based 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 believe 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 show that in 2003 business fliers bought tickets that cost 51 percent less than the average listed price for business fares.
That loss of potential revenue comes as carriers have been stung by the high price of oil and jet fuel.
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.
Fort Worth, Texas-based American said its 2004 cost per available seat mile — an industry standard that measures how expensive it is to fly one passenger one mile — would rise 7 percent to 9.75 cents.
Delta said more than 10 percent of its expected $400 million loss in the first quarter of 2004 will be tied to fuel costs.
At US Airways, the biggest threat on the horizon according to the company's chief executive is Southwest's expansion into Philadelphia, one of US Airways' hubs.
"They're coming to kill us," US Airways chief executive David Siegel said last week to employees, who are being asked to accept pay cuts of as much as 25 percent.
Similarly, Delta, which is facing stiff competition from AirTran, has been trying to convince 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.
Shares of AMR Corp., the parent of American, dropped 19 cents to close at $12.25 on the New York Stock Exchange, where Delta's shares fell 15 cents to close at $7.75. US Airways' stock declined by 13 cents to close at $4.47 on the Nasdaq Stock Market.
