How Airlines Went From Rags to Riches

Sept. 24, 2008— -- 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.

So, revenue has been rising, helped, of course, by the dropping price of oil. We started out the year at about $100 a barrel -- which seemed oh-so-high -- until we learned in July what high really meant: $147 a barrel. And now, oil is relatively cheap again -- remember, I said relatively because it recently jumped from $93 to $120 and back down to $106 in the span of a week. Still, it's better than those doom and gloom prognosticators who said we'd hit $200 by the Fourth of July.

But, again: the oil situation remains highly volatile. Just ask United, which tried to play the fuel hedging game that Southwest excels in, only it didn't quite work out as they'd hoped. They hedged, and then oil came down well below the price they hedged at (say goodbye to half a billion.)

Still, analysts are predicting strong numbers for the fall because, despite all the new fees and higher prices, passenger loads are holding fairly steady. In other words, people aren't fed up enough to stay home, as some had predicted.

And the airlines themselves are holding fairly steady. Don't look for sudden upticks in available seats, not domestically: the airlines have parked their old gas guzzlers for good, it seems. Getting stuck in a middle seat will remain a possibility for passengers for a long time to come (unless we pony up for the "premium" seats.)

Another "don't look for": big price decreases, disappearing fuel surcharges, and free food. It's not going to happen, not for a good long while, anyway. The airlines have labored too long under rising oil prices -- remember, the climb actually began all the way back at the turn of the century, reaching the onset of truly dizzying heights this past July. What we are paying for now is, the airlines' recovery costs, if you will.

So, bottom-line time: what's happening now is good for the airlines -- well, if or until oil goes ape again. Some of you may recall that, earlier this summer, I pointed out that some had used the movie title, "There Will Be Blood" as a sort of forecast du jour for the airline industry. Not so much anymore. Now, the only blood required is from the passengers -- in the form of delays, fees and ticket prices.

Whack. Maybe I was wrong. Maybe the airlines aren't starring in this latest version of whack-a-mole. Maybe, it's we, passengers, playing the part of the mole.

This work is the opinion of the columnist and in no way reflects the opinion of ABC News.

Rick Seaney is one of the country's leading experts on airfare, giving interviews and analysis to news organizations, including ABC News, The New York Times, The Wall Street Journal, Reuters, The Associated Press and Bloomberg. His Web site FareCompare.com offers consumers free, new-generation software, combined with expert insider tips to find the best airline ticket deal.