Could higher fuel prices actually help U.S. airlines?

Premium cabin revenues

The big six airlines have another advantage over the LCCs: A substantial portion of revenue is derived from premium business and first class customers and extensive international operations. This premium and international travel business is far more profitable than domestic coach, where the big six compete with LCCs. The additional premium revenue will help the big six offset operating costs on less profitable domestic coach routes and survive an extended fuel price crunch, while most LCCs have no premium business to cushion the blow.

Deep pockets

In tough times cash is king and those airlines with lots of cash on hand today are better prepared to withstand the run up in fuel costs, plus they will benefit from the demise of every competitor. Most big six airlines have deeper pockets than most LCCs, especially since they've been in recovery mode in recent years. Some of the largest airlines have amassed considerable cash sums that will help them through these horrendous times (see chart below on airline cash positions). Though American Airlines has nearly $5 billion in their cookie jar, the airline incurred a $655 million increase in jet fuel costs in the first quarter over the same period in the previous year. This turned American's tidy $81 million profit in the first quarter of 2007 into a whopping $328 million loss during the quarter that ended most recently.

At current price levels, it would take American a little under four years to burn through all its cash. Not all U.S. airlines are as well positioned. United Airlines will run out of cash in just seven quarters if the airline is unable to take evasive action.

Those airlines with sufficient cash to hang on while weaker airlines fold will acquire the defunct airline's customers and find it easier to pull down additional capacity and raise airfares. With every capacity reduction or liquidation, the remaining airlines gain strength.

Grounding older airplanes

As airlines pull down capacity, they ground airplanes. Older, gas guzzling aircraft will be the first to go. Many parked airplanes will be sold or returned to the lessors, cutting costs and giving airlines an additional shot of cash. Delta Air Lines and Northwest Airlines each plan to remove up to 20 mainline jets by year end and Delta plans to remove up to 70 regional jets as well. United Airlines will eliminate 30 aircraft and US Airways will return six leased airplanes. Some airlines have large outstanding orders for new aircraft, but many of these orders will likely be canceled or deferred by cash-strapped airlines.

Alas, while the industry may find a silver lining in the current crisis, these developments are not good news for business travelers. As airlines reduce capacity with no fear of competitive reprisal, they will also continue to raise airfares. Those airlines know they'll lose some leisure passengers and even some discretionary business travelers. But they'll eventually be flying full with fewer seats overall and more people on board who are willing to pay a premium price – that is if they are one of the survivors.

Read previous columns

Send David your feedback: David Grossman is a veteran business traveler and former airline industry executive. He writes a column every other week on topics of interest and concern to business travelers. E-mail him at

  • 1
  • |
  • 2
Join the Discussion
blog comments powered by Disqus
You Might Also Like...