How Airlines Went From Rags to Riches

Remember that old carnival game, whack-a-mole?

If not, you've got a ringside seat now -- as whack-a-mole is played over and over again in the U.S. airline industry -- with the airlines starring as the mole. Watch our domestic carriers claw their way to the surface from their deeply dug holes, only to have that smashing mallet send them back to the depths.

The mallet wielders? Right now, we'll pin the blame on previously unlikely suspects: the dubious mortgage lending practices that fostered the current financial meltdown.

Chances are, up until now, the only association you made with lending institutions and the airlines was the second mortgage required to buy a holiday airline ticket. Face it, many of us had no idea that mortgages -- bad ones -- were going to be a factor in driving up the cost of airfare.

You see, an airline's life blood is fuel; and as nervous investors fled the stock market for the commodities market in the past week or so -- oil prices, which had been falling like a stone, jumped more than 25 percent (most of that in one day) and then slid back down 15 percent.

Meanwhile, whack-a-mole's play-by-play guys and color commentators -- namely airline financial analysts -- have spent the past couple of weeks upgrading airline stocks left and right. Giddy doesn't begin to describe their newly upbeat prospects for airlines turning things around in 2009. Why so giddy? Take a look.

Airline Prospects

The gravity of the energy situation, along with a weak domestic economy (now spreading abroad) has forced airlines -- ready or not -- into a new generation of aviation, which includes:

Airfare Hikes -- a steady stream of airfare hikes over the past year; almost one a week in the first half of this year.

Capacity Cuts -- 180,000 fewer seats flown each day by the end of the year and 70 million less in 2009.

Air Traffic Control -- our air traffic control system is less likely to get needed funds for problems like delays and cancellations.

Fuel Surcharges -- domestic fuel surcharges averaging $67 roundtrip domestically and $349 roundtrip for trans-oceanic international travel.

Airline Fees -- new and higher fees ranging from checked bags, sodas and WiFi.

Award Programs -- watered-down frequent flier loyalty program benefits.

Now, would it be a stretch to say the industry will actually go from rags to riches? Probably, but consider this:

Bag fees -- those annoying add-ons that are driving leisure travelers crazy -- are making real money for the carriers. Northwest Airlines expects to collect $150 million to $200 million a year on its bag fees alone; by mid-September, they were collecting bag fees to the tune of almost half-a-million dollars a day. And United estimates its bag fees will bring in as much as $300 million a year.

Then, there are those capacity cuts, ready to kick in big time, now that autumn is here: Northwest, for example, has slashed its domestic flights by 10 percent or more in the third quarter, and it will drop to 18 percent or more in the fourth quarter (compared with last year).

Then there's that little matter of rising airfares -- watch for that to really kick in starting in November (which is why I say, start your holiday shopping now).

So, here's a new formula for you: Reduced capacity plus higher fares plus new fees equals an airline that's suddenly profitable again after a long, long fuel cost-induced drought.

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