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Airline Industry

Why planes in the desert may boost fares  Apr 21, 2009

MARANA, Ariz. - Hundreds of once-proud aluminum birds are parked here with engines sealed, tires wrapped and windows covered. Whether these passenger jets will soar across continents again will have a direct impact on how much you pay to fly.

The airline industry has grounded more than 11% of its jets in dusty airplane boneyards, mostly in New Mexico, Arizona and California. Planes from all corners of the world end up here, but U.S. airlines have led the way, clipping the wings of 800 aircraft since mid-2008, according to London-based Ascend Worldwide Ltd. That's a fleet far bigger than AMR Corp.'s American Airlines' 626 jets (plus 47 in storage).

More are coming -- jets are being parked at a rate of about 30 per month this year. And the drop in international business travel has prompted the mothballing of wide-body jets.

What happens in aircraft storage fields may ultimately lead to fewer cheap tickets for consumers. By aggressively removing seats from service, airlines have better matched capacity to weakened demand, enabling them to fly through this recession with more financial stability than in past downturns.

Many of the parked planes, especially older ones, may never fly again, or are unlikely to fly again for U.S. airlines. They will be too expensive to return to service, especially if they miss scheduled overhauls while parked. And since U.S. airlines have scant orders for new jets at Boeing Co. and Airbus, the storage strategy may lead to a jet shortage when the economy rebounds, which could mean higher airfares.

"Planes that are leaving the U.S. fleet for the most part are leaving forever, and that will lead to higher fares," said Douglas Runte, a managing director at Piper Jaffrey & Co. "Airlines are going to have some pricing power. I think there are potential benefits for the industry."

Pricing Power

Already, some airlines have reported that ticket purchases improved in the past few weeks, and summer travel may be stronger than airlines anticipated. Last weekend, for the second weekend in a row, a few airlines even tried a small across-the-board fare increase.

It didn't work -- prices rolled back when competing airlines didn't raise their prices. But a $10 increase for July travel did stick, and considering there hasn't been a broad-based fare hike since last summer, the moves could be a sign of slight optimism among airlines.

The groundings, which began as a response to last summer's sky-high fuel prices, turned into adroit planning for weak travel demand, saving airlines from flying too many mostly-empty trips or pricing tickets at fire-sale levels. Airlines are losing lots of money, but analysts say it could have been far worse.

"They did absolutely the right thing for absolutely the wrong reason," said Mr. Runte. "Even when fuel came down, they continued to park airplanes."

UAL Corp.'s United Airlines, for example, is grounding 100 airplanes from its fleet, which totaled 460 planes at the end of 2007. All 94 of United's 737s are being grounded, plus six 747s. Through the first three months of this year, United's capacity was down 13.1% compared with the first quarter of 2008, the largest decline among major U.S. airlines.

Desert storage areas have historically been chop shops for retired jets, but increasingly, airlines are parking newer planes, too -- a trend expected to strengthen after the summer travel season.

"We're getting indications from industry there will be another movement after summer. And it will be next-generation aircraft," said John Keating, president of Evergreen Maintenance Center Inc., which runs one of the world's largest aircraft storage facilities here.

Evergreen already has more than 200 jets parked here, and among the planes Mr. Keating expects in Marana: five relatively new Boeing 777 wide-bodies, the jewel of many airplane fleets.

Climate for Retirement

Airlines and aircraft-leasing companies put jets in the desert because of low humidity -- moisture can corrode airplanes -- and a rarity of hail storms or tornadoes that can damage jets. Besides capacity reductions, some planes end up in storage after they are repossessed by banks and leasing companies seeking new operators.

In Marana, once a Central Intelligence Agency base for covert operations, Evergreen Maintenance, a unit of Evergreen International Aviation Inc., not only stores jets but also overhauls and repaints them when they return to service. The company also dismantles planes for parts and recycling (the jets' high-grade aluminum gets reused in laptop and Blackberry cases).

It costs about $60,000 a month to store a 747 in Marana, according to Steve Coffaro, Evergreen's vice president of sales.

Why planes in the desert may boost fares
Marana, AZ / Image via

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