May 28, 2008 / 12:57 AM / 10 years ago

U.S. airlines running out of options as oil bites

NEW YORK (Reuters) - U.S. airlines have raised fares, added new fees and surcharges, cut jobs and reduced services — and still find themselves running out of options to counter record fuel prices threatening their survival.

A Northwest Airlines jet lands behind another Northwest jet parked at a gate at the Minneapolis St.Paul International Airport in Minnesota April 14, 2008. REUTERS/Eric Miller

Even mergers, long considered an integral component to the airlines’ long-term survival, seem less likely now than they did a few months ago.

While Delta Air Lines Inc (DAL.N) has agreed to acquire Northwest Airlines Corp NWA.N, merging may not be an option for other carriers as cash becomes king in a battle for survival.

“Even at current oil levels of $130 a barrel, the airlines are involved in a massive survival game,” said Julius Maldutis, president of consulting firm Aviation Dynamics.

Seven small airlines have filed for bankruptcy or stopped operating in the past five months and, if oil prices do not ease by the end of the summer, Maldutis said several network carriers could file for bankruptcy protection by the autumn.

“You are not going to file for bankruptcy when you are down to a couple of hundred million (dollars) in cash — you are going to file for bankruptcy when you have still got a billion and a half or so if you are going to hopefully survive operationally,” Maldutis said.

Major U.S. airlines have raised round-trip fares by up to $60 over the past few days as they struggle with oil prices that on Tuesday continued to trade around $129 a barrel, roughly double where they were a year ago.

Analysts expect the legacy carriers to get through the summer season — bookings remain reasonably strong — but if oil prices do not fall by early autumn, some network airlines could face major decisions involving capacity cuts or bankruptcy protection.

“I think bankruptcy protection is a very high probability at these oil price levels for a few carriers within the domestic arena,” said Brian Nelson, equity analyst at Morningstar. “Ideally, this industry needs a liquidation. It needs consolidation.”

Even James May, chief executive of top U.S. airline lobbying group, the Air Transport Association, has forecast more airline bankruptcies if oil prices do not retreat.

“No one is exempt from the threat,” May said in an interview with Reuters last week, adding that capacity cuts could reach 20 percent and affect dozens of cities, possibly triggering more calls in Congress to re-regulate the airline industry.

GOD-GIVEN RIGHT

Passengers make their way through Reagan National Airport in Washington November 21, 2007. REUTERS/Kevin Lamarque

The latest air fare increase is the 13th successful rise in 17 attempts by the major airlines since December 20, according to Tom Parsons, chief executive of Bestfares.com, an Internet travel Web site.

“A lot of people have a feeling that one of their God-given rights in the United States is to have cheap air fares — that’s certainly going to have to change,” said Rick Seaney, CEO of airline ticket research site FareCompare.com.

“People that were used to flying coast to coast for $250 round trip probably are looking at $500 round trip for leisure travel and a business person is probably looking at $1,000 to $1,500 — that’s where we are heading.”

Network carriers have announced other measures to counter high fuel prices and a weak U.S. economy in recent months.

American Airlines, owned by AMR Corp AMR.N, said last week it will cut thousands of jobs and reduce capacity.

American, the world’s largest airline by traffic, also said it plans to charge $15 for many passengers’ first checked bag, an unprecedented move by a major U.S. airline.

AMR Corp CEO Gerard Arpey said the airline industry as it is constituted today was simply not built to withstand oil prices at $125 a barrel.

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

Delta unveiled plans in March to cut 2,000 jobs and scale back flights and UAL Corp UAUA.O, parent of United Airlines, has said it will shrink its fleet up to 4 percent this year.

Some analysts say the major airlines have just about run out of options, but Steve Lott, a Washington-based spokesman for the International Air Transport Association (IATA), a trade group for international airlines, said airlines will continue to find ways to become more efficient.

“The low-hanging fruit has already been picked, so airlines are forced to look deeper into their operations and further up the tree to see what else they can cut,” said Lott.

“However, we can’t give up ... because there is the possibility that airlines will see deep financial problems so we need to keep looking for further efficiencies and turn over every rock.”

Seaney of FareCompare.com. believes that, if oil prices do not come down, the U.S. government may have to help the major airlines, just as it did following the attacks of September 11, 2001.

“The government is going to end up having to do something,” said Seaney. “The airlines are at the end of their rope.”

Additional reporting by Kyle Peterson and John Crawley; editing by Brian Moss and Patrick Fitzgibbons

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