AIRLINES Rising fuel costs negate savings from pay cuts

High-cost airlines face the most pressure to find other ways to cut costs.
ASSOCIATED PRESS
Even as big airlines are beginning to successfully rein in labor costs -- $1 billion in annual concessions from Delta's pilots being the latest example -- soaring fuel expenses are essentially negating their effects, leaving many of the carriers in perilous financial shape.
"It's like they're all treading water, but they've got 100 pound weights around their necks," said airline consultant Robert W. Mann of Port Washington, N.Y. "You can only do it for so long."
As a result of cutbacks in recent years, labor expenses for the airline industry as a whole are about the same today as they were a decade ago at about 34 percent of total costs, according to the Air Transport Association.
But that masks the differences between high-cost carriers such as Delta Air Lines Inc. and UAL Corp.'s United Airlines and competitors such as Southwest Airlines Co. and JetBlue Airways Corp. that pay workers lower wages.
And while all carriers have been hit by higher fuel costs that Mann says will account for about 17 percent of industrywide operating costs in 2004 -- up from 12 percent in 2002 -- executives of high-cost airlines face the most pressure to find other ways to cut costs.
Delta agreement
For Delta, that meant winning an agreement late Tuesday from negotiators for its pilot union for a new contract that calls for a 32.5 percent wage cut effective Dec. 1 and no raises for the rest of the five-year pact.
The airline's roughly 7,000 pilots, some of whom earn as much as $300,000 per year, must still vote on the contract.
Analysts said the Delta pact, following earlier labor cost reductions at bankrupt carriers UAL and US Airways Group Inc., increases the pressure on Continental Airlines Inc. and Northwest Airlines Corp. to squeeze concessions out of their workers.
"It's not clear any of these business models works well with these energy costs," said Mann. Indeed, profitability is as elusive today for large carriers as it was shortly after the Sept. 2001 terrorist attacks.
Quarterly losses
On Thursday, US Airways and UAL reported third quarter losses of $232 million and $274 million, respectively.
The seven largest U.S. carriers reported more than $1.3 billion in combined net losses for the third quarter and lost $5.1 billion for the first nine months of 2004.
And with oil prices trading above $50 a barrel, even the plucky budget carriers are beginning to show signs of strain.
ATA Holdings Corp.'s ATA Airlines, the nation's 10th-largest carrier, filed for bankruptcy protection on Tuesday. And on Thursday JetBlue said third-quarter profits fell to $8.4 million, a decline of more than 70 percent from a year ago.
The carrier's chief executive, David Neeleman, attributed the company's disappointing performance to record high fuel prices and a "weak pricing environment" -- a revealing, if disheartening, assessment from a low-fare airline.
JetBlue
J.P. Morgan airline analyst Jamie Baker responded to JetBlue's report with a warning that unless oil prices fall soon, JetBlue, perhaps the most efficient carrier around, runs the risk of its first-ever money-losing quarter at the start of 2005.
The airlines are trying to keep fuel expenses down any way they can -- fueling up in cities where it is cheap, taxiing with one engine and even lightening the amount they carry in reserve in the event of an emergency.
They're also attempting to raise ticket prices, albeit with only limited success so far. Last week American, United, Delta and Northwest added a $10 fuel surcharge to round trip tickets.
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