United skids on fuel costs
Skyrocketing fuel costs have plunged U.S. airlines into a sea of red ink -- and travelers can expect higher air fares and fewer flights from which to choose as a result.
United Airlines on Tuesday became the latest victim of the industry’s woes. The airline’s parent company reported a larger-than-expected loss in the first quarter, sending its stock into a tailspin.
Analysts and industry executives said that ticket prices needed to rise significantly just as the peak summer travel season takes off to help airlines weather the recent surge in oil prices, which is pushing up the price of jet fuel to record highs.
“There needs to be a minimum 15% across-the-board hike in fares to offset higher fuel costs,” said Vaughn Cordle of AirlineForecasts in Washington. “This problem is going to devastate the industry -- in fact, it already has.”
Such a boost would increase a typical round-trip economy fare from Los Angeles to Dallas-Fort Worth, for example, to nearly $280 from $242.
Although the higher prices would be painful for travelers, some industry watchers say they are essential to rescuing the airlines. Some analysts said the industry’s financial pain was reaching levels not seen since the aftermath of 9/11, when a slump in air travel drove several big carriers into bankruptcy.
The industry estimates it will spend almost $60 billion on jet fuel this year, up from $15 billion in 2003.
“An airline ticket has got to reflect the full cost of fuel,” Richard Anderson, chief executive of Delta Air Lines Inc., told reporters Tuesday in Washington, suggesting a fare increase of 15% to 20% was needed.
United’s parent, Chicago-based UAL Corp., posted a first-quarter loss of $542 million. The airline, the No. 2 carrier at Los Angeles International Airport, blamed the loss primarily on a $618-million jump in fuel costs -- 50% more than a year earlier -- as well as the slowing U.S. economy.
“The pressure of high energy prices and a weakening U.S. economy are a wake-up call that the pace of change must accelerate,” said Glenn Tilton, CEO of UAL. “The path to sustainable profitability requires us to fundamentally overhaul every facet of our business.”
United’s loss was bigger than Wall Street expected and rattled investors. UAL shares plunged 37%, falling $7.88 to $13.55. American Airlines parent AMR Corp. fell 14%, and Continental Airlines Inc. slid 17%. Oil jumped $1.89 to $119.37 a barrel in New York trading Tuesday.
Airlines have been cutting flights and raising fares recently. By some estimates, there have been 11 industrywide fare hikes since late last year. Just a week and a half ago, most major carriers raised the price of a round-trip ticket by as much as $30.
Airlines are also looking for other ways to raise money. Last weekend, for example, the fee United charges to change a reservation on a domestic flight was raised from $100 to $150.
Analysts say the fact that most of the increases are being matched industrywide -- ensuring that they will stick -- is both unusual and a sign of the carriers’ financial distress.
“In some cases, there is sticker shock at the new air fares and the myriad fees,” said Wido Schaeffer, president of TravelStore, a travel service headquartered in Brentwood.
Schaeffer said his business clients have started to cut back -- his sales were off 6% in March and are down this month.
Leisure travelers seem to be defying the trend, however, fare expert Terry Trippler said.
“These higher fares just aren’t deterring travelers,” said Trippler, who runs travel website TripplerTravel.com. “They may go to Orlando instead of Paris, but they’re still going to go.”
United was the fourth airline in recent days to report losses because of high fuel costs, along with American, Continental and JetBlue Airways Corp. Delta and Northwest Airlines Corp. report first-quarter results today.
Several smaller carriers have filed for bankruptcy protection, most recently Frontier Airlines, which has continued flying.
Consolidation is another option. Delta and Northwest announced a proposed merger this month. United is reportedly talking about a marriage with Continental.
United’s $4.45-a share first-quarter loss compared with a loss of $1.32, or $152 million, a year earlier. Revenue rose 7.7% to $4.71 billion.
To cut costs, United said it would lower its planned 2008 spending by $400 million and eliminate 1,100 employees by the end of the year.
UAL also said it would cut capacity by 9% this year, on top of a 5% reduction in the fourth quarter of 2007, and remove as many as 15 more narrow-body aircraft from its operating fleet, for a total of 30 grounded planes.
Heavily traveled “shuttle” markets, such as L.A.-San Francisco and New York-Washington are prime targets for schedule cuts, analysts said.
Excluding flights by its commuter affiliate, United has 89 daily departures from LAX, 14 from John Wayne Airport in Orange County, six from Ontario Airport, four from Bob Hope Airport in Burbank and one from Long Beach Airport.
Said Jim Corridore, an airline analyst at Standard & Poor’s Corp.: “We are reaching a point where we have to talk about survival of the industry again, just like we did after 9/11.”
The Associated Press was used in compiling this report.