Rising costs reshaping air travel across the USA

Since last fall, his airfare has jumped from $800 round trip to $1,500. That's partly because United stopped service from Chicago to Oakland, which was cheaper to fly to than San Francisco International. United also switched to small jets at Manchester; seats sell out faster.

Last week, his ticket for a non-stop flight from Boston to San Francisco cost $2,400 round trip, partly because he changed his original ticket, incurring extra charges.

"I was stunned," he says. "Everyone has their limits, both individuals and corporate clients."

A USA TODAY/Gallup survey in April found that 45% of air travelers would be less likely to fly this summer if fares are higher.

Driven by fare increases, revenue for U.S. carriers rose about 10% in the first three months of this year, a healthy jump in normal times. But every major U.S. carrier except Southwest Airlines luv posted losses in the quarter. The cost of fuel was up 50% or more.

Some carriers don't have the financial cushion to withstand the cost pressures. Fuel prices have forced seven small U.S. carriers to shut down since Christmas. Frontier Airlines was forced to seek Chapter 11 bankruptcy court protection on April 11.

Even Southwest, which has reported 17 years of uninterrupted quarterly profits, lost money on flying last quarter.

It reported a $34 million profit only because of its sophisticated fuel-hedging program. Through aggressive trading in oil futures contracts, Southwest was able to knock $302 million off what it would have paid had it bought all its fuel at current market prices.

The carrier's executives acknowledge that they can't play that risk-laden game forever.

After holding the line against fare increases during the first three months of this year, Southwest raised fares twice during the first two weeks of April.

"The reality is that there's no U.S. airline that has a sustainable business model if $117-a-barrel oil prices endure," says Dave Emerson, head of Bain & Co.'s global airline consulting practice.

Expansion plans curbed

Southwest, which has been aggressively expanding at U.S. airports for 35 years, will not grow in the second half of this year.

Nor will Orlando-based discounter AirTran, which had been growing at double-digit annual rates since 2002.

Clamping down on potential business is not a choice airlines make easily. It's one thing to sell a bunch of planes. Pulling out of a city also means shutting down ticket counters and gates, and laying off or moving employees.

"Once you make those decisions to get rid of those things, you can't very easily or quickly bring them back," Emerson says.

Such are the tough decisions airlines are making this year, while they still have billions of dollars in cash on hand.

By 2009, if the price of jet fuel doesn't abate and airlines can't raise prices enough, even carriers with big bank accounts could start running short of cash and find it difficult to borrow.

"There are going to be more airline failures in this environment, and they could be liquidations," says Delta Chief Financial Officer Edward Bastian.

JPMorgan's Baker likens the potential financial impact of soaring jet fuel prices to the economic blow airlines suffered after the Sept. 11, 2001, terrorist attacks.

Millions of passengers, out of fear, quit flying, sending the industry into a financial free fall. The government beefed up airport and plane security, and passengers eventually returned.

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