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Airline Experts Say Fuel Prices Punishing Industry

Posted on: Wednesday, 13 July 2005, 21:00 CDT

Jul. 14--WASHINGTON -- A group of aviation experts drew a picture Wednesday of hope and despair for the nation's troubled airline industry.

First, the hope: Traditional airlines have significantly reduced their costs to the point that were it not for higher fuel prices, some would be reporting significant profits.

And the despair: No one knows if today's $60-a-barrel oil prices will decline, stay the same or even go higher.

"Fuel is a reality, and legacy airlines don't fly gliders," said Jamie Baker, an airline analyst with J.P. Morgan Securities. "Regrettably, stripping out fuel expense is but a mere analytical exercise."

Mr. Baker was one of four experts who painted a desperate picture of the airline industry at a hearing of the Aviation Subcommittee of the Senate Commerce, Science and Transportation Committee.

The assessment was met with frustration by some lawmakers who see that flights are full but the major airlines are still reporting heavy financial losses.

"The travelers are back," said Sen. Conrad Burns, R-Montana, chairman of the Aviation Subcommittee. I have not seen Washington, D.C., so full of tourists since 9/-11."

The panel said legacy airlines are beginning to narrow the gap between their operating costs and those of the low-cost carriers. But the experts said there's still a significant difference, one magnified by jet fuel prices, pension obligations and federal taxes and fees.

The hearing provided an advance look at a report on the condition of the airlines due in September from the Government Accountability Office. It also offered a preview of what lawmakers face next year when they are scheduled to reauthorize spending for the Federal Aviation Administration.

The airline industry is pushing Congress to use the legislation to reduce the wide range of taxes and fees it pays for air-traffic control, security and other government services. According to the Air Transport Association, the industry will pay $15 billion in federal taxes and fees this year.

The industry group also wants Congress to replace an aging computer system used in the air-traffic control system, which is contributing to delays and congestion.

"It should be removed and placed in the Smithsonian where it can be admired as a great technology achievement of the 1950s," said James May, the association's president.

The GAO predicted the industry would lose another $5 billion this year in addition to the $28 billion it's lost since 2001. Continued bleeding is likely to push more carriers to seek bankruptcy protection.

"The airline industry is one of the worst performing sectors of all," said JayEtta Hecker, director of physical infrastructure issues at the GAO.

The industry has yet to recover from diminished travel resulting from the September 2001 terrorist attacks or the SARS virus in 2003. And now, it is being hammered again by a worldwide surge in jet fuel prices.

"If you have some magic for $60 fuel, I would like to hear it, because we are at wits' end," Mr. May told senators.

In addition to fuel costs, the GAO, a congressional watchdog agency, said the traditional airlines are saddled with high fixed costs, including pension contributions, aircraft leases and debt. During the next four years, the GAO said the carriers face $60 billion in fixed obligations, $10.4 billion of which are for pensions.

Ms. Hecker said the industry is continuing to evolve under a deregulatory process that started in 1978. She noted that 160 airlines have filed for bankruptcy protection since then, including 20 since 2000.

Today, she added, the low-cost carriers have enough market share to set fares for the entire industry. "The industry is still playing out the deregulation of the 1970s," Ms. Hecker said.

Mr. Baker noted that legacy airlines have made great strides in reducing costs. Airfares and revenues are rising, as carriers make progress in hiking prices without running off consumers.

With fuel prices in mind, the experts said it was important for Congress to help the carriers contain other costs -- most notably pension contributions and federal taxes and fees.

Mr. Burns expressed an interest in addressing the industry's tax burden: "I think we are going to take a look at that."

The Commerce Committee's ranking Democrat, Sen. Daniel Inouye of Hawaii, agreed: "If we do not begin to solve the problems plaguing the air carriers, we will see more failures in coming months and certainly more jobs cut."

Congress is considering a pension reform proposal by the Bush administration. The initiative is designed to head off a taxpayer bailout of the Pension Benefit Guaranty Corp. by strengthening the funding requirements and increasing insurance premiums.

The airlines have asked for various forms of relief that would give them an extended period of time to fully fund their pension obligations.

Without extensions, airline experts said pension contributions could force more airlines to seek bankruptcy protection.

Mr. Baker predicted Delta Air Lines Inc. and Northwest Airlines Inc. could face bankruptcy in 2006. He said American Airlines Inc. is in better shape, but could also face a similar situation in late 2007 or early 2008 if fuel prices remain high and there is no pension payment relief.

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Source: The Dallas Morning News

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