Airline bosses agree on same bitter medicine

Kathryn Mikells, executive vice president and chief financial officer of United Airlines, speaks during the 2010 Reuters Travel and Leisure Summit in New York February 23, 2010.

NEW YORK (Reuters) - Sit down with the top U.S. airline bosses as I was able to do this week, and you'll hear a group of executives preaching the same sermon: Control capacity and add new fees.

If you fly a lot, you're not going to like this.

This is a fraternity of born-again penny pinchers, determined to raise fares, cut every unnecessary cost and collect any extra fees their customers are willing to pay. But they're also primed for a bigger overhaul that could take the form of takeovers if the right opportunities arise.

Such a unified view, very apparent from interviews with the chief financial officers of four top airlines at this week's Reuters Travel and Leisure Summit in New York, results from the collective battering the airlines have suffered this decade.

If it hasn't been oil prices, terrorism, or the economic crisis that has hit them, it has been fare wars, government restrictions and the airlines' own mismanagement.

So airlines have shown they can take a beating. Now what? And what will this industry look like in five or 10 years?

Kathryn Mikells of United Airlines parent UAL Corp UAUA.O said the key to survival is capacity discipline. United and its rivals slashed the number of seats for sale by canceling services in 2008 to offset record high fuel costs.

Fuel prices later retreated, and the capacity cuts left the industry better positioned to combat a recession that severely eroded travel demand.

Lesson learned, Mikells said on Tuesday.

"The trends are very positive in terms of the industry being more disciplined," she said. "That's exactly what we need in order to take this recovery period and start to translate it into price power and ultimately sustained profitability."

WISHING FOR A MERGER

Mikells repeated UAL's long-held view that the U.S. airline industry is too fragmented. UAL has in recent years been in advanced merger talks with Continental Airlines CAL.N and US Airways Group (LCC.N). Those deals didn't pan out, but Mikells said UAL remains open to merging with the right partner.

Perhaps that partner is US Airways Group (LCC.N), whose CFO Derek Kerr, visited Reuters' Time Square offices later the same morning.

US Airways, formed from a 2005 merger with America West Airlines, loudly advocates consolidation despite the high regulatory barriers and tight credit markets.

"We believe it's going to happen over time, I just don't know whether it's this year or next year or when," Kerr said. "Overtime, you will see this industry consolidate."

Both Mikells and Kerr said they were pleased to see the success of the merger of Delta Air Lines (DAL.N) and Northwest, which might seem strange given it created a more formidable competitor until you remember that anything that leads to a cut in capacity is seen as positive for the industry.

Even, Capt. John Prater, president of the Air Line Pilots Association, agrees that consolidation is "inevitable." He told Reuters on Wednesday that the union would support a merger that stabilizes the industry. He said a UAL/Continental tie-up makes sense because they have little overlap on their routes.

FARES AND FEES

The CFOs were reluctant to speak candidly about the scope for fare hikes in 2010. Some reported a rebound in pricing power. Others weren't so sure, noting the failure of some attempted fare hikes so far in 2010.

"It's been a mixed bag. Some fare increases have been successful and others have not. And I think that is reflective of the economy, which I would describe as a mixed bag with mixed signals right now," said Tom Horton CFO at American Airlines parent AMR Corp AMR.N on Wednesday.

But if the fare outlook is murky, the outlook for new fees for travel services likes bag checks, meals and entertainment is painfully clear for passengers. Some of those fees may be unpopular, but they are here to stay. Their will be more of them. And they're probably going up.

"We're testing a number of different things right now. We'll continue to test the mix to determine what customers really want," said UAL's Mikells.

"They clearly have a willingness to pay for things they value and that they want," she said.

FUEL: ALWAYS THE WILD CARD

Almost the only area of disagreement among the airlines is how to cope with volatile fuel prices.

In 2008, U.S. airlines were clobbered as fuel costs soared to new heights. So they hedged aggressively, only to see fuel fall and money wasted on out-of-the money hedges.

Carriers may have found their footing a little since then, but they have diverging views on how best to offset that cost.

Kerr said US Airways, which is currently unhedged because the costs outweigh the benefits. That compares with UAL, which is 70 percent hedged in the first quarter of 2010.

AMR's Horton said his carrier sticks to its strategy of layering hedges simply to smooth out price volatility. And Southwest Airlines (LUV.N), whose tradition of aggressive fuel hedging has long been the envy of the industry, lessened its hedge in 2008 when prices came down.

(Reporting by Kyle Peterson)