Oil prices push airlines to shrink, airfares to grow

Record oil prices that hit an all-time peak of $119.90 a barrel on Tuesday are pushing the USA's airlines into crisis mode.

From the biggest national network carriers to the smallest discounters, they're slamming already-slowed growth plans into reverse and talking loudly about raising fares — by a lot.

Delta CEO Richard Anderson told reporters at a Washington briefing Tuesday that oil prices have gotten so high that every fare in the industry needs to go up 15% to 20% just for the carriers to stay even.

Senior executives at United uaua, AirTran aai and JetBlue jblu on Tuesday announced large first-quarter losses because of high oil prices. They said their airlines will stop growing or, in United's case, speed the rate at which it is shrinking. All three warned that the cuts will go deeper if oil prices don't fall soon.

That trio joined American amr, Continental cal, Southwest luv and Delta dal, which already had announced plans to shrink or to curtail their growth plans. Northwest has signaled that it, too, plans to cut capacity.

But in light of Tuesday's record oil prices, investors weren't appeased. The Amex Airline index fell 12.35%, and all but two carriers, JetBlue and Southwest, saw their shares lose more than 10% of their value. Shares of United and AirTran were hit especially hard, falling almost 37% and 21%, respectively.

Details about the planned capacity cuts were sparse. But most endangered are leisure-oriented routes and secondary business travel routes such as JetBlue's flights between New York and Tucson. The discount carrier said it is suspending service on that route because there are not enough travelers willing to pay high enough fares to make it profitable.

"Every aircraft has to earn its way in our network," said CEO Dave Barger, signaling a major shift in its previous willingness to let secondary business routes develop in time into moneymakers.

United announced the most sweeping cuts Tuesday. By fall, the USA's No. 2 carrier will be flying 9% less domestic capacity than it did in the fourth quarter of 2007. United also will eliminate 1,100 jobs.

United CFO Jake Brace told reporters and analysts Tuesday that current fuel prices turn normally gut-wrenching questions about reducing service, fleet and staff into "very straightforward decisions." United now plans to park at least 30 of its least-fuel-efficient planes this year.

AirTran is making the most dramatic shift in its approach to capacity growth. In the first quarter, its capacity was up 10.8% over the first quarter of 2007. But in the last quarter of this year, and in all of 2009, its year-over-year growth rate will fall to zero. It had previously planned to grow by 10%.

CEO Bob Fornaro said that with sustained oil prices well above $100 a barrel, AirTran could begin shrinking capacity in the fourth quarter and in 2009.

Fornaro said carriers will "change the revenue environment. We'll push up our average fares, and redundant capacity will leave."

But "just raising prices without reducing capacity is not going to raise the revenue," he said. "To support the price increases, capacity has to drop."

Fornaro also predicted that most other carriers will take more aggressive steps to curtail capacity and raise fares by midsummer.

UAL, United's parent, lost $537 million, or $4.45 a share in the first quarter, more than triple its $152 million loss a year earlier. Its quarterly fuel bill rose $534 million .

AirTran's loss totaled $34.8 million, or 38 cents a share, vs. a $2.2 million profit, or 2 cents a share, in the first quarter of 2007.

JetBlue lost less than analysts had expected: $8 million, or 4 cents a share, vs. a loss of $22 million, or 12 cents a share, in the same period last year.

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