Mounting misery for airlines, travelers

Even before the recent flight cancellations, airlines and passengers were facing a new wave of travel misery.

Record-high fuel prices and the industry's fragile finances have led to a new round of bankruptcies among smaller carriers in recent weeks, including ATA Airlines, Skybus and Aloha Airgroup.

Bigger airlines are shrinking their fleets to cut fuel costs, even as demand for travel remains strong, meaning flights are growing ever more crowded and unpleasant.

And layoffs are beginning again for a business that, to many of its customers, is already suffering service problems. It feels that way to airline workers, too, and as the industry's decline accelerates, passengers can expect harried and grumpier gate agents and flight attendants.

Moreover, all across the air-travel system in the United States, equipment — air-traffic-control systems, airplanes, airline computer systems — is aging and in many cases overtaxed. That means breakdowns and weather problems become more disruptive.

In the near term, airlines cannot raise fares fast enough to cover rising fuel costs — oil settled at a new record price on Wednesday of $110.87 a barrel. That has plunged the industry back into the red after a brief, two-year run of profits. Merrill Lynch analyst Michael Linenberg expects the industry to lose $1.9 billion this year.

One bad sign: A handful of airline stocks are cheaper (Frontier, $1.79; Expressjet, $2.21; Mesa, $0.96) than an airport beer.

Years of cost cutting on maintenance — and, to some critics, a lax approach in regulation by the Federal Aviation Administration — appear to be catching up with domestic airlines and their customers.

American and its domestic competitors have been scaling back maintenance spending for years. Some airlines sent work overseas in search of less-expensive labor. They cut wages of mechanics in the United States and reduced their numbers. And they quickened the pace of work at maintenance facilities.

"They let too many people go," said Kevin Cornwell, an MD-80 captain at American who is also a pilots-union official. "They sold spare parts years ago to raise cash. Things don't get fixed as fast."

The industry's biggest problem is the price of jet fuel. It follows the price of oil, which has more than doubled since dropping to $52 a barrel in January 2007.

At today's air fares, a lot of planes simply cannot operate profitably. Though airlines raised fares on a broad scale 10 times during the first quarter, four of those increases failed to hold. And on many routes, the increases that did hold were ineffective because discount airlines refused to match the increases.

Southwest Airlines, the most influential carrier on domestic fares, raised its average fare just 2 percent last year, to $106.60. And consumers have become surprisingly adept at shopping on the Internet for the lowest fare, frustrating the industry.

So, major carriers such as Northwest Airlines, Delta and United have responded in part by grounding older, fuel-guzzling planes.

But the planes most vulnerable to higher fuel prices may be regional jets that seat 50 or fewer passengers. Smaller jets became more ubiquitous in recent years as major carriers withdrew their larger planes from many smaller markets.

Most of the smaller jets are operated by regional airlines under contract to major carriers. And the major carriers are looking for ways to rid themselves of some of these money-losing arrangements.

Mike Boyd, a consultant, expects the North American fleet of regional jets to begin plunging this year from 1,675 to 1,042 by 2013. That would reduce service to many smaller cities and could eliminate flights to some markets altogether.

American said in November that it wanted to sell or spin off its American Eagle unit, which operates about 200 of the smaller, less-efficient jets. No buyer has publicly emerged.

Continental Airlines scaled back, by 69 regional jets, the flying it contracts Expressjet to perform. Trying to fly most of those planes under it own name, Expressjet lost $70.2 million last year versus a 2006 profit of $92.6 million. Even with low ticket prices, it was only able to sell 56 percent of the seats on those planes.

And Delta last month told Mesa Air it planned to cancel an agreement paying Mesa to fly about three dozen smaller regional jets.

"There's no place to put those planes," said Boyd, the consultant.

"It's like a dead-end plane," added Roger King, an analyst at CreditSights. "The 50-seat jets are not economic in this high-fuel environment."

Some major carriers think merging will be their salvation, and Delta and Northwest appear to be in talks again about a combination. For fliers, however, such a deal could hold much more downside than benefit. Some business travelers who range far and wide would be able to do more travel through a single airline, and perhaps more cheaply.

But the merger, especially at current fuel prices, would probably lead to fewer combined flights in some markets, making the remaining planes more crowded.