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The Honolulu Advertiser
Updated at 10:34 a.m., Tuesday, July 22, 2008

Airlines believes cuts could bring back profits

Associated Press

PHOENIX — New travel fees mean hundreds of millions of dollars a year for beleaguered airlines, and executives say they need them more than ever as fuel costs continue to suck profits out of the industry. Plane tickets, it seems, now come with only the bare bones promise of getting from Point A to Point B.

"We'll manage through this," US Airways Chairman and CEO Doug Parker said of the ongoing pressure to cope with fuel costs.

"It's not outrageous to suggest that what's already been done is enough to get the industry profitable in 2009," Parker said.

United Airlines, US Airways, and Jet Blue all posted big losses Tuesday, though all three beat Wall Street estimates. Airline stocks, which have been at historic lows for many carriers, shot up as oil prices dropped more than $4 a barrel at one point in Nymex trading.

Last week, Atlanta-based Delta Air Lines Inc. reported a $1.04 billion loss for the quarter and Fort Worth, Texas-based AMR Corp., the parent of American, posted a $1.45 billion loss for the same period. Continental Airlines swung to a $3 million loss.

Amid the dismal profit numbers, airline officials told Wall Street analysts that the silver lining is that a la carte fees may eventually stem the bleeding.

US Airways Group Inc., for example, expects to raise an additional $400 million to $500 million annually, up $100 million from earlier estimates.

The Tempe, Ariz.-based carrier has been more creative than others when it comes to fees. Besides bag charges, it has added charges for sodas and choice seats in coach. The airline also announced previously that it would remove movie systems from many domestic flights to save on fuel.

Meanwhile, JetBlue hopes to bring in about $40 million from customers buying seats with extra leg room this year. Its $15 fee for a second checked bag is expected to translate into about $20 million in additional revenue. A ticket change fee, which doubled to $100 in the second quarter, is part of a "basket of fee changes" expected to produce about $50 million in extra revenue in 2008.

United, which expects a $3.5 billion fuel bill this year, said it could see $275 million in new money from checked luggage fees as well as other baggage charges.

"We're doing all we can to control our costs and to improve our revenue to offset fuel," Chairman, President and Chief Executive Glenn Tilton said.

Minneapolis airline expert Terry Trippler said the new travel fees are here to stay. If anything, Trippler said, airlines probably will look to include more fees like charges for carry-ons.

"Whatever is going to cost them money is going to cost you money," he said. "You carry on a bag, the weight of that bag is going to cost the airline money, therefore it will cost you money. You want a soda, well, to carry those sodas on a plane or to buy them will cost them money. Therefore it will cost you money."

Consumers need to realize that air travel is no longer the luxury it once was, Trippler said. When people think of airlines, he said, they should imagine it like a big bus with wings.

"You have no amenities on the bus," he said. "And guess what: they also ask you to pay for a second bag on a bus."

The message seemed to be lost so far on travelers in New York's Penn Station.

"I think they are just sticking it to people," Denise Conway of Gastonia, N.C. said of the airlines. Conway was taking an Amtrak train from New York to North Carolina with her granddaughter, in part because she said it was too expensive to fly.

"Flying is definitely becoming more of a luxury," she said. "I'm not asking them to sell gourmet dinners, but people like me — I don't work — I could never afford to fly to New York. Not anymore."

Michelle O'Leary, 35, of Marshfield, Mass. agreed. Instead of flying, O'Leary bought a cheap fare on Megabus to take her two daughters from New York to Boston. The trip for the three of them cost $96. She said it would have cost them $678 to fly.

Frank Pittelli of Long Island, New York, added: "Flying nowadays is great for people who can afford it," he said. "But with these extra fees, it feels like (the airlines) are just hurting the less fortunate."

Besides the extra fees, airlines are expected to make big reductions in the number of routes they offer. By parking planes and cutting seating capacity, executives hope to keep demand (and therefore fares) high for the remaining tickets. According to estimates by US Airways, any roundtrip ticket needs to cost more than $299 to cover the cost of fuel.

So US Airways said it would further cut capacity 6 to 8 percent on domestic flights in the fourth quarter, and then cut another 8 to 10 percent in 2009.

United will trim overseas routes by 7 percent in the fourth quarter. Routes to be eliminated will include Denver-London, Los Angeles-Frankfurt and San Francisco-Nagoya, Japan. Tilton said United will close its Nagoya station.

Tilton said fourth-quarter mainline domestic capacity will shrink 16 percent compared with the previous year. United dropped about 50 routes from its domestic schedule on Thursday alone as it takes 100 aircraft out of its fleet, including all of its 737s, Tilton said in a hot line message to employees on Tuesday.

JetBlue expects September capacity to be down 10 percent and does not expect to grow next year. JetBlue thinks capacity will slip one to three percent in the third quarter and fall six to nine percent in the fourth quarter.

US Airways and United also announced that they would shrink their work force even more than previously announced.

United previously announced plans to eliminate roughly 3,800 jobs through furloughs, layoffs, and early retirement packages, including as many as 1,600 from salaried workers and management. But on Tuesday the company said it will aim to cut 7,000 jobs by the end of next year in conjunction with fewer flights, with the additional reductions coming from front-line workers.

US Airways said it cut more management jobs and will reduce its 2,000 positions, an increase from the 1,700 positions it previously announced.

Despite the weak earnings reports, airline shares soared in Tuesday's session as oil prices tumbled. UAL was the biggest gainer after it signed an extended credit-card agreement with Chase Bank USA and accomplished other financial maneuvers that it said would add $1.7 billion to its cash balance, including $200 million it expects to get over the next two years.

Airline shares are still far below their values around the start of the year. Falling precipitously as oil prices shot up.

At the closing bell, UAL was up $3.26, or 65.3 percent, at $8.25. US Airways shares added $1.46, or 54.3 percent, at $4.15. JetBlue rose 61 cents, or 15.7 percent, at $4.50.