Airlines squeeze fliers as profit soars
The nation’s airlines were late more often this summer, lost more baggage and bumped more passengers off flights than in any summer this decade. They also made more money.
Despite the worst summer ever for air travelers, major airlines posted huge profits as they packed more passengers into fewer and smaller planes.
Profit at American Airlines, the nation’s largest carrier, jumped more than tenfold to $175 million in the third quarter while Delta Air Lines, the third-largest, said net income quadrupled to $220 million compared with the year-earlier period. Profit would have been higher if not for rising fuel costs.
The results elated investors but fueled anger among consumer groups.
“I’m aghast there isn’t more public outcry over this,” said Kate Hanni, president of the Coalition for an Airline Passengers’ Bill of Rights, a consumer advocacy group based in Napa Valley. “They’re making money hand over fist at the expense of passengers.”
On Wall Street, initial jubilation with the better-than-expected results gave way to worries about another surge in fuel prices this week that could sink future airline profits. The escalating cost of oil prompted some airlines to increase fares by $10 on Thursday.
But for now, airlines are having a banner year. Most of the profit gains came from cutting costs and packing more passengers into planes because airlines have had difficulty raising fares.
“It was the best quarter since 9/11,” said Ray Neidl, an analyst with Calyon Securities, adding that airlines were also able to sell more expensive tickets as they pushed international travel. “They loaded up the planes and had better seat management.”
It’s all part of the changes sweeping air travel in recent years. Domestic coach flights often mean narrower seats, less legroom, and charges for food and entertainment. Some airlines take a no-frills approach and charge for baggage, pillows and seating assignments. At the same time, international flights have turned first-class travel into a big moneymaker, with higher prices but also gourmet meals, spacious seats, more legroom and seats that turn into beds.
Some frequent travelers tried to keep their emotions in check Thursday.
“I try not to get upset if there is nothing I can do about it,” said Beth Butera, a computer analyst from San Clemente. This frequent flier is resigned to service that is “sometimes really good and sometimes really bad.”
“I try to make the best of it,” she said. “They have to make money, but maybe they can lower the fares for Christmas.”
Fare increases for domestic flights this year have been modest or have been retracted because of resistance from passengers. Since 2000, when average domestic fares hit $422, plane tickets have fallen to an average of $380 amid increased competition from low-cost carriers.
Big airlines such as Southwest, American and Delta said they had record load factors, or the percentage of the plane filled by passengers, as they reduced the size of their fleets in service.
Southwest, the nation’s largest discount airline, said Thursday that third-quarter earnings jumped to $162 million, up 238% from the year-earlier period. Meanwhile, No. 4 Continental Airlines reported net income of $241 million, up slightly from $237 million a year earlier.
United Airlines, the largest carrier at Los Angeles International Airport, will report its results Tuesday. Analysts expect the airline to post earnings similar to the record $274 million it reported in the second quarter.
But Wall Street is bracing for a downturn as fuel prices set records. Fuel is now the industry’s largest expense.
An airline trade group estimates that every $1 increase in the price of a barrel of fuel increases industry costs $465 million. If the price of fuel remains high and fewer people fly because of a weakening economy, the airlines could be hit hard again. They took years to recover from the fallout of the Sept. 11, 2001, terrorist attacks.
“The airlines have just come off $35 billion in unprecedented losses since 9/11 and only now are starting to see profitability as a result of painful reductions,” said David A. Castelveter, spokesman for the Air Transport Assn. “Despite these reductions, they are facing the highest fuel prices in history.”
With fares remaining relatively low, more people flew this summer than ever before.
The large airlines, on average, had planes flying with 80% to 90% of their seats filled, which meant popular flights were likely to be overbooked and passengers had to be bumped off.
The planes were also tardy more often, with a quarter arriving late this year, up from 16% five years ago, according to the Transportation Department.
“The service levels this summer were a challenge,” said Edward Bastian, president of Delta, which posted the best on-time record among the domestic airlines although it did not fare as well with mishandled baggage. It is spending $100 million for a new baggage-handling system at Atlanta’s Hartsfield-Jackson International Airport.
“We realize we have to continue to make investments back into service,” Bastian added.
Who’s to blame?
Airlines say an antiquated air-traffic control system developed in the 1950s can’t manage a 40% jump in flight operations since 1995 and needs to be updated. The number of domestic flights jumped from 3.6 million in 1995 to nearly 5 million this year.
The Federal Aviation Administration says airlines are jamming too many flights during certain times of day at larger airports. A Bush administration panel met Thursday to begin looking at the possibility of limiting flights at certain airports, including New York’s John F. Kennedy International, one of the worst for delays.
Passenger groups say airlines slashed wages and cut their workforces too much during the downturn, and disgruntled airline employees are taking it out on travelers.
“What the passengers are feeling from the airline employees is not anger at them but anger at management for not restoring wage cuts when the airlines are making money again,” Hanni said.
For their part, the airline industry said the latest profit gains pale in comparison to the losses over the previous six years and airlines are starting to reinvest earnings in buying planes, upgrading seats and adding staff.
Delays also cost airlines $6 billion in lost revenue, so they have an incentive to reduce late arrivals and departures, industry officials said.
“Carriers have done what the customers have asked for -- reduce costs to provide low-fare service” Castelveter said. Safety and low fares are always listed in surveys as passengers’ top considerations, he added. “But there is a sacrifice that comes with it.”