Airline service falls short, but profits don't

The nation's airlines were late more often this summer, lost more baggage and bumped more passengers off flights in more than a decade. They also made more money.

Despite the worst summer ever for air travel, major airlines posted their largest profits in years during that period as they packed more passengers into fewer and smaller planes.

Profits for American Airlines, the nation's largest carrier, jumped more than tenfold to $175 million in the third quarter, while Delta Air Lines, the third largest, said net income tripled to $220 million compared with the year-earlier period. Profits would have been higher if not for rising fuel costs.

The results elated investors but fueled anger among consumer groups.

"I'm aghast there isn't more public outcry over this," said Kate Hanni, president of the Coalition for Airline Passengers' Bill of Rights, a consumer advocacy group based in Napa Valley, Calif. "They're making money hand over fist at the expense of passengers."

On Wall Street, initial jubilance with the better-than-expected results gave way to worries with another surge in fuel prices this week that could sink future airline profits.

Rising fuel prices prompted United Airlines to increase fares by $10 each way on Thursday. American, Northwest Airlines and US Airways and others matched those increases by Friday afternoon.

Fare increases for domestic flights in 2007 have been modest or have had to be retracted because of resistance from passengers. Since 2000, when average domestic fares hit $422, plane tickets have dipped to an average of $380 with increased competition from low-cost carriers.

But for now, airlines are having a banner year. Most of the profit gains came from cutting costs and packing more passengers into planes as airlines have had difficulty raising fares.

"It was the best quarter since 9/11," said Ray Neidl, analyst with Calyon Securities, adding that airlines were also able to sell more expensive tickets as they pushed international travel. "They loaded up the planes and had better seat management."

It's all part of the changes sweeping air travel in recent years. Domestic coach flights often mean narrower seats, less legroom, charges for food and in-flight entertainment.

Some airlines take a no-frills approach and charge for baggage, pillows and seating assignments. At the same time, international flights have turned first-class travel into a big moneymaker with higher prices but also gourmet meals, spacious seats, more leg room and chairs that turn into beds.

Some frequent travelers tried to keep their emotions in check.

"I try not to get upset if there is nothing I can do anything about it," said Beth Butera, a computer analyst from San Clemente, Calif., who is a frequent flier resigned to service that is "sometimes really good and sometimes really bad."

Big airlines such as Southwest Airlines, American and Delta said they had record "load factors," or the percentage of the plane filled by passengers, as they cut back on capacity or the number of planes flying.

Southwest, the nation's largest discount airline, said Thursday that third-quarter earnings jumped 238 percent to $162 million compared with the year-earlier period.

Meanwhile, No. 4 Continental Airlines reported net income of $241 million, up slightly from $237 million a year earlier.

United Airlines reports its earnings Tuesday. Analysts expect the airline to post profits similar to the record $274 million it reported in the second quarter.

But Wall Street is bracing for a downturn with record fuel prices. Fuel costs now account for airlines' largest expense.

An airline trade group estimated that every $1 increase in the price of a barrel of fuel increases industry fuel costs by $465 million. If the price of fuel remains high and fewer people fly, the airlines could be hit hard again after taking years to recover from the aftermath of the terrorist attacks of Sept. 11, 2001.

"The airlines have just come off $35 billion in unprecedented losses since 9/11 and only now are starting to see profitability as a result of painful reductions," said David Castelveter, spokesman for the Air Transport Association. "Despite these reductions they are facing the highest fuel prices in history."

With fares remaining relatively low, more people flew this summer than ever before.

The large airlines, on average, had planes flying with 80 to 90 percent of their seats filled, which meant popular flights were likely to be overbooked and passengers had to be bumped.

The planes were also late more often, with one-quarter arriving late this year, up from 16 percent five years ago, according to the Department of Transportation.

"The service levels this summer were a challenge," said Edward Bastian, president of Delta, which posted the best on-time record of domestic airlines though it did not fare as well with mishandled baggage.

It is spending $100 million for a new baggage-handling system at Atlanta's Hartsfield-Jackson International Airport. "We realize we have to continue to make investments back into service," Bastian said.

Who is to blame?

Airlines say an antiquated air traffic control system developed in the 1950s can't manage a 40 percent jump in flight operations since 1995 and needs to be updated. The number of domestic flights jumped from 3.6 million in 1995 to nearly 5 million this year.

The Federal Aviation Administration says airlines are jamming too many flights during certain times of the day at larger airports. A Bush administration panel met Thursday to look at the possibility of limiting flights at certain airports, including New York's John F. Kennedy International Airport, one of the worst for delays.

Passenger groups say airlines slashed wages and cut the work force too much during the downturn, and disgruntled airline employees are taking it out on travelers.

"What the passengers are feeling from the airline employees is not anger at them but anger at management for not restoring wage cuts when the airlines are making money again," said Hanni, of the passengers' group.

For their part, the airline industry said the latest profit gains pale in comparison to the losses over the previous six years, and it is now starting to reinvest earnings to buy planes, upgrade seats and add more staff members.

Delays also costs airlines $6 billion in lost revenues so there is a financial incentive to reduce late arrivals and departures, airline-industry officials said.

"Carriers have done what the customers have asked for, reduce costs to provide low-fare service," Castelveter said, adding how safety and low fares are always listed in surveys as passengers' top consideration. "But there is a sacrifice that comes with it."