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Airlines Test Limits Of Fare, Fee Increases

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The Associated Press

Published: May 23, 2008

DALLAS - Higher fares and new fees are irritating air travelers, but airlines still can't raise money or cut flights fast enough to cover ever-higher fuel prices.

In the view of airline executives and analysts, the industry is facing its toughest challenge yet, with little prospect that carriers can return to profits anytime soon.

Even though most of the big airline companies have large cash stockpiles, analysts suggest they could burn through their cash and go bankrupt by early next year. Already, several smaller airlines have filed for bankruptcy protection or simply shut down in recent months.

"This is worse than 9/11," said Ray Neidl, an analyst with Calyon Securities. After the 2001 terrorist attacks, "at least you knew passengers were coming back. Oil at $130 is unsolvable."

Among the largest airlines, analysts rate US Airways as the most likely to be pushed into bankruptcy, followed by United Airlines parent UAL Corp.

Just a few weeks ago, mergers were the talk of the airline industry. Delta Air Lines announced it would buy Northwest Airlines Corp., and executives of other carriers met to discuss other deals that analysts said would lead to bigger but more efficient airlines that could survive in a world of high-priced oil.

The price of oil, however, has nearly doubled in the past year and jumped 13 percent in just the past month, scrapping all those merger calculations and making airlines worry more about hoarding cash.

"This is going to hurt the consolidation effort," said Roger King, an airline analyst for CreditSights. "When you put two companies together, there are upfront costs, and cash is tight everywhere. American has more than $4 billion in cash, but that can go pretty quickly."

So airlines are raising fares and mining other fees, anything to bring in money.

Airlines were already charging $25 to check a second piece of luggage, but American will break ground next month by charging $15 for the first bag.

Citigroup analyst Andrew Light estimated that if the new fee hits 20 percent of American's passengers - elite frequent fliers, those paying full fare and international flights are exempt - it would raise $320 million.

But American's estimated fuel bill for 2008 has gone up $3 billion just since the beginning of the year.

American announced Wednesday that it would cut 11 percent to 12 percent of its U.S. flights this year and lay off workers - probably thousands of them, although officials declined to give a figure.

Both United and Delta have announced plans to cut capacity about as much as American, which would reduce their fuel burn and leave travelers fighting for seats on fewer planes.

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