Airlines are struggling to get any lift amid record oil prices and a weakening economy. ATA Airlines and Aloha Airlines both shut down operations and filed for bankruptcy this week alone while larger carriers like
Northwest Airlines (NYSE: NWA) are raising prices and cutting routes to stay alive. In fact, the only airline eking out a profit seems to be
Southwest Airlines (NYSE: LUV).
Southwest Airlines revealed $111 million in net income during the fourth quarter after it was able to lock in lower fuel prices using derivative hedges. These contracts enable companies to pay a small fee in order to lock in prices for fuel years later. As a result, the airline was able to save over $300 million in fuel costs and post a 95 percent increase in net income. Just how long Southwest can protect its 67 quarters of consecutive profit, however, will surely be tested in the coming year amid soaring expenses.
Many other airlines haven't been so lucky in facing these rising costs. Those that were in bankruptcy a few years ago did not have the financial flexibility to make the fuel hedges that Southwest made and are now completely exposed. As a result, many airlines are being forced to take other actions to raise revenues and cut expenses. Analysts remain concerned, however, that these could revive the industry's past trouble.
Northwest Airlines announced that it would raise its fairs, fuel surcharges and baggage fees and cut its domestic flight schedule by 5 percent in order to help its bottom line. The airline also said it had suspended plans to hire more pilots and flight attendants while cutting capital spending that doesn't involve airlines by $100 million this year. Meanwhile, fuel prices are now seen as being $1.7 billion higher than it projected in May when it exited bankruptcy, which could put the company back at risk.
Other airlines have also taken similar actions.
UAL Corporation's (NYSE: UAUA) United Airlines announced that it will begin charging fliers that wish to take a second piece of luggage beginning in May.
Delta Airlines (NYSE: DAL) is also imposing new or higher fees on many travelers including frequent fliers, passengers traveling with pets and people booking their ticket over the phone.
All of the problems can also be traced back to soaring fuel expenses. Delta saw its fuel bill jump 28 percent to $1.36 billion during the third quarter while United Airlines saw a 43 percent jump. Oil prices have reached speculative highs after OPEC promised that it would not raise production levels for the remainder of the year. Meanwhile, the declining dollar has also contributed to the speculation since all commodities are now more expensive.
In the end, the airlines are now in the "perfect storm" of problems with declining consumer spending and quickly rising expenses. Even the best airline in the industry is seen as at risk of losing its profitability. These problems may not disappear until the slowdown in the U.S. economy is over and that could take awhile. Whether or not these airlines will survive that time remains to be seen.
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