Airline Woes Mean Trouble for Travelers

Passengers can expect much higher fares, packed planes and limited flight selections.

By Martha Lynn Craver, Associate Editor, The Kiplinger Letter

June 12, 2008

Soaring fuel costs are walloping the airline industry, forcing drastic changes. Carriers are expected to lose $7 billion this year, after a $4-billion profit in 2007. Eight U.S. airlines have gone out of business in less than a year, one is in bankruptcy and the rest of the survivors are planning large cutbacks to try and stay aloft.

Expect at least a 20% reduction in domestic capacity after the busy summer travel season. Older planes will be mothballed, including the smaller, 50-seat regional jets that are not very fuel efficient on a passenger mile basis. Airline employees of all sorts will be laid off -- from pilots to ground crews to ticket agents. So far, 9,000 jobs have been cut, and thousands more will be laid off soon. Plans to buy new planes are being put on hold. But these actions may not be enough. Some analysts are predicting another round of bankruptcies after the first of next year if fuel prices continue at current levels. "Airlines are at a crossroads. ... The current business model is not sustainable at oil prices above $130 a barrel," says Ray Neidl, an analyst with Calyon Securities.

Airlines will try to raise fares by 20%, and even more at airports where cuts in service reduce competition. But this will be difficult to do in a slow economy, analysts say. "The race is on to see if airlines can raise fares high enough to cover the fuel bills before they run out of cash," says Roger King, an analyst with CreditSights in a research report.

Travelers can also expect an end to snacks and other free perks. "You know it's serious when they take the pretzels away," says Roger Cohen, president of the Regional Airlines Association. Fees will continue to increase, too, for baggage, pet travel, ticket changes and anything else the airlines can think of.

Smaller airports will be hit hard, losing service or hosting fewer nonstop flights because airlines will route trips through hubs. That’s more efficient for the airline, if not for the traveler. So far, 35 communities have lost service, including Wilmington, Del., Grand Canyon, Ariz., Lancaster, Pa., and Hagerstown, Md. More face cuts this fall; among them: Omaha, Neb., Bakersfield, Calif., Columbia, Mo., Tulsa and Oklahoma City, Okla., and Little Rock, Ark. Some of these communities will feel a ripple effect from the cuts. Businesses aren't expected to move away, but those looking for a new site may conclude that they are better off relocating where air service is stronger.

Congress may help out some. A big increase is likely in the Essential Air Service program, which provides subsidies to ensure that airlines continue to service small communities. Lawmakers will add about $50 million to the program, which currently provides $127 million, but it won't be enough to offset what the airlines are losing, nor will it be enough to restore service to all affected communities. Another possibility is a tax holiday -- perhaps temporarily suspending the federal fuel or ticket tax. A bigger federal bailout is not in the cards, nor reregulation of the industry.

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