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Soaring fuel costs negating airlines' labor concessions

By BRAD FOSS
The Associated Press

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"It's like they're all treading water, but they've got 100 pound weights around their necks," said airline consultant Robert Mann of Port Washington, N.Y. "You can only do it for so long."

As a result of cuts in recent years, labor expenses for the airline industry as a whole are about the same today as they were a decade ago at about 34 percent of total costs, according to the Air Transport Association. But that masks the differences between high-cost carriers such as Delta Air Lines and United Airlines and competitors such as Southwest Airlines and JetBlue Airways that pay workers lower wages.

And while all carriers have been hit by higher fuel costs that Mann says will account for about 17 percent of industrywide operating costs in 2004 — up from 12 percent in 2002 — executives of high-cost airlines face the most pressure to find other ways to cut costs.

Bankruptcy still possible

For Delta, that meant winning an agreement late Wednesday from negotiators for its pilot union for a new contract that calls for a 32.5 percent wage cut effective Dec. 1 and no raises for the rest of the five-year pact. The airline's roughly 7,000 pilots, some of whom earn $300,000 per year, must still vote on the contract. And its crucial debt restructuring efforts remain a work in progress, prompting Delta's CEO to caution yesterday that bankruptcy remains a possibility.

Analysts said the Delta pact, following earlier labor cost reductions at bankrupt carriers United and US Airways, increases the pressure on Continental Airlines and Northwest Airlines to squeeze concessions out of their workers.

After slashing its annual costs by $5 billion — more than half of which came from labor — UAL is now seeking an additional $1 billion in savings, a significant portion of which is likely to come through layoffs at its United Airlines unit.

Similarly, US Airways, which was thrust into bankruptcy court for a second time as higher fuel costs drained its cash, says it needs $650 million in givebacks from unions representing machinists, flight attendants and passenger service employees. This is in addition to the $300 million in annual savings already achieved through negotiations with pilots and other workers.

"It's not clear any of these business models works well with these energy costs," said Mann. Indeed, profitability is as elusive today for large carriers as it was shortly after the Sept. 11 terrorist attacks.

Yesterday, US Airways and United reported third quarter losses of $232 million and $274 million, respectively. The seven largest U.S. carriers reported more than $1.3 billion in combined net losses for the third quarter and lost $5.1 billion for the first nine months of 2004.
 
And with oil prices trading above $50 a barrel, even the plucky budget carriers are beginning to show signs of strain.

Weak pricing environment

ATA Airlines, the nation's 10th-largest carrier, filed for bankruptcy protection Tuesday. And yesterday, JetBlue said third-quarter profits fell to $8.4 million, a decline of more than 70 percent from a year ago. The carrier's chief executive, David Neeleman, blamed the company's disappointing performance on record-high fuel prices and a "weak pricing environment" — a revealing, if disheartening, assessment from a low-fare airline.

J.P. Morgan airline analyst Jamie Baker responded to JetBlue's report with a warning that unless oil prices fall soon, JetBlue, perhaps the most efficient carrier around, runs the risk of its first-ever money-losing quarter at the start of 2005.

To be sure, many carriers are in significantly worse shape than JetBlue, even after three years of cost-cutting.

For example, the cost to fly one seat one mile — an industry benchmark — was 10.99 cents during the third quarter of 2001 at American Airlines. In this year's third quarter, that figure fell to 9.68 cents, thanks to $1.8 billion in labor concessions agreed to in 2003 and other operational tweaks.

The high price of jet fuel accounts for a penny or two, but that still leaves American's cost of flying sharply higher than JetBlue's, whose cost per available seat mile in the July-September period, excluding the impact of higher fuel costs, was 5.79 cents.

Taxiing with one engine

All else being equal, oil prices would have to fall to about $35 a barrel in order for American, Delta and other industry giants just to break even, according to Calyon Securities airline analyst Ray Neidl. "Fuel remains a major, major problem," he said.

The airlines are trying to keep fuel expenses down any way they can — fueling up in cities where it is cheap, taxiing with one engine and even lightening the amount they carry in reserve in the event of an emergency.

They're also attempting to raise ticket prices, albeit with only limited success so far. Last week American, United, Delta and Northwest added a $10 fuel surcharge to round-trip tickets. And analysts say there are signs that Southwest is advertising fewer discounts these days.