Record oil prices test survival of U.S. airlines

By Mark McSherry - Analysis

NEW YORK (Reuters) - It took a $15 surcharge on a suitcase to finally drive home the message that major U.S. airlines are facing an economic crisis greater than the impact of the September 11 attacks.

Seven small airlines have filed for bankruptcy or stopped operating in the past five months and, if oil prices stay at current levels or go higher, some major airlines face the prospect of Chapter 11 protection, experts say.

"The airlines have been saying for some time they are in a crisis mode, but nobody cared -- until they slapped a surcharge on a suitcase," said Patrick Murphy, principal of aviation consulting firm Gerchick Murphy Associates.

Murphy said the crisis will lead to major cuts in services, thousands of job losses and much higher air fares.

American Airlines, owned by AMR Corp (AMR.N), said on Wednesday it will cut thousands of jobs and reduce capacity in a move to counter record fuel prices and a weak U.S. economy.

But it was the announcement by American, the world's largest airline by traffic, that it plans to charge $15 for many passengers' first checked bag that got the headlines.

This is an unprecedented move by a major U.S. airline and somehow it managed to illustrate the predicament of the network carriers better than any red ink.

AMR Corp chief executive Gerard Arpey said on Wednesday the airline industry as it is constituted today was simply not built to withstand oil prices at $125 a barrel. Crude oil futures hit a record $135 a barrel on Wednesday, more than double the price a year ago.

BIGGEST TEST SINCE 9/11

The September 11, 2001, hijack attacks accelerated a financial downturn for airlines that eventually led to four major carriers -- US Airways Group Inc (LCC.N), United Airlines, Northwest Airlines Corp NWA.N and Delta Air Lines Inc (DAL.N) -- going bankrupt between 2002 and 2005.

UAL Corp's (UAUA.O) United Airlines spent more than three years in Chapter 11, emerging in 2006, while Northwest and Delta stepped out of court protection last year. US Airways eventually merged with America West Airlines in 2005.

This time around, however, analysts said any airline that is forced to seek bankruptcy may find it harder to reemerge.

"It's hard to see how all of our major airlines can survive without bankruptcy and even then whether they can come out of bankruptcy," Murphy added.

Sky-high fuel prices and a weakening U.S. economy have stalled the airline industry's modest recovery from the 2001- 2006 downturn.

Goldman Sachs said last week it expects U.S. crude to average $141 a barrel in the second half of 2008 and earlier this month said oil could even shoot up to $200 within the next two years as part of a "super spike."