Airlines groping for savings as fuel cost soars

Business Materials 9 February 2008 06:10 (UTC +04:00)

( Reuters ) - The need for U.S. airlines to control costs is greater than ever with losses creeping back into balance sheets and shares slipping, but carriers are simply running out of fat to trim after years of restructuring.

The main culprit undercutting profits is stubbornly high fuel prices. But overall U.S. economic weakness is threatening to erode travel demand and make it more difficult to generate revenues.

Nearly all carriers - even low-cost airlines like JetBlue Airways and AirTran Airways - are looking for ways to run their operations more efficiently without compromising their services in the ultra-competitive industry.

"The high fuel costs just make you look harder and harder and harder," said Bob Fornaro, chief executive of AirTran Airways, a unit of AirTran Holdings.

Fornaro said airlines must be creative in saving money now that much of the industry has completed a wholesale restructuring.

"Cost reductions are not necessarily what you take away. It's really how you manage your assets and how you use your assets," he said.

AirTran constantly reevaluates its route structure to add capacity in markets were it sees demand and cut capacity in markets that cannot support it.

AMR Corp's American Airlines, the world's largest airline, has set a 2008 cost savings target of $150 million - half its 2007 target. The carrier has not identified specific ways it intends to reduce its costs.

"Now they're getting to the point where they're cutting into things they shouldn't cut," airline consultant Michael Boyd, referring to the airline industry in general. "Any major slashes, they're just not there any more."

In fact, carriers must brace for even higher costs in the coming year as labor unions demand higher wages and benefits after their sacrifices of the last six years, he said.

In one revenue-based approach, Alaska Air Group, parent of Alaska Airlines, recently realigned its schedule between Seattle and six California cities to soak up more premium-paying business travelers.

The airline also has its eye on costs. It is planning to complete the phase-out of its remaining 14 MD-80s this year, having accelerated the exit dates for two of these aircraft due to high fuel costs.

"We're looking at the fall schedule now to see if there are further opportunities to pare unprofitable flying and perhaps retire some of the MD-80s a couple of months sooner than currently planned," Brad Pedersen, Alaska's vice president of finance, told analysts in a recent conference call.

JetBlue, meanwhile, is focused on increasing secondary revenues during 2008. Last year, the airline increased change fees and established a telephone reservation fee. Last month, JetBlue launched refundable fares as a lure to passengers who want flexibility.

"This is the first of several initiatives we intend to announce in the next couple of months as we work to diversify our product to attract high-yielding customers," chief executive Dave Barger said.

JetBlue is also cutting its growth rate to between 5 and 8 percent for the year, selling more older Airbus A320s and deferring some deliveries in the 2010 time period.