The beleaguered plight of US airlines

Year 2008 will be another year reported to see year-on-year decline in traffic. The last five or six years showed the market actually contracted.

The beleaguered plight of US airlines

Year 2008 will be another year reported to see year-on-year decline in traffic. The last five or six years showed the market actually contracted. Predictions as of August 4, 2008 warn the industry will lose $10 billion this year, rivaling 2001 and 2002 as a year of historic losses.

While the industry costs and yields had both been trending downwards, costs have been increasing since 2000. On the domestic yield versus cost index, fuel prices in 1998 shows a barrel of crude just a little over 10 percent what it costs today, showing massive implications on carriers. In the first two quarters of 2008, without exception, all US carriers have suffered the costs of high fuel costs. Gains were reported by Southwest, however, showing earnings of $164 million in 2007 and $228 million in 2008 first quarter. 2007 was a good year for airlines, but without any radical changes in anything other than fuel, fortunes of airlines have been reversed almost 180 degrees.

According to the US Department of Transportation, real US industry yields have continually declined at an average of 2.6 percent per year since 1978. Real pricing have declined based on inflation trends. 2008 yield is expected to fall lower than 2007’s by 13.0 cents in yield or the average passenger revenue per revenue passenger mile.

Based on experts’ reports, the US airline industry load factors have increased substantially since 1990, which is reason why the carriers have been able to stay afloat despite price drops. Load factors have been fulfilled and increased by airlines. On average, almost 4 out of 5 in 2007 seats were sold. US Airways just recently reported a load factor of 89.9 percent; another low-cost carrier Allegiant has reported increased load factor of 95 percent in 2007- 2008. However Southwest, in 2007, has been the largest US carrier in terms of passenger share, representing 20 percent of the share in overall market; 1 out of 5 passengers travel with Southwest.

The largest 230 city pairs, out of 40,000 in the US, for approximately half of all US overseas and domestic traffic collectively account for almost half of all traffic in the country. Half of the traffic today travels in dense markets, while half in less dense markets; they will remain a vital part of the national aviation business. Two of the largest low-cost carriers operate small or non-hubs, as do the legacy carriers who use their large or medium hubs.

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Operating revenues for large US carriers have been supported by their international networks, not domestic traffic. The Official Airline Guide (OAG) reports show that domestic networks carry a -23.7 percent growth since 2004 until mid 2008. Low-cost carriers have taken up the load off from the legacy airlines, flying 77.5 percent since 2000 last quarter. As a result, the legacy carriers scooped the business from the international traffic, securing themselves 9.5 percent load until mid-2008. Low-cost carriers carry almost one-third of all US passengers showing 32 percent share of passenger market until 2007.

On fuel, predictions are even worst.

Crude oil prices have almost quadrupled since 2000 and are forecast to remain at historically high levels for the foreseeable future. Prices for December 2008 for crude oil, light sweet are expected by the US Department of Energy (Energy Information Administration) at around $124.7 per barrel, based on July 28, 2008’s price of $137. Average monthly jet fuel prices are more than three times their long-run average with the July 2008 average tipping the scale at $4.06 per gallon.

Fuel now accounts for nearly 30 percent of all passenger costs, more than twice that of 2000. In the first quarter of 2008, fuel costs as percentage of cost per ASM (cents) stood at 29.4 percent for instance for ATA, compared to 13.1 percent in the same period of 2000. Orbitz, for example, showed that the cheapest non-stop round trip fare (consuming 79.0 gallons of fuel per passenger) with a whopping 78.8 percent of the ticket price used to pay fuel alone.

This will mean a huge percentage change in domestic departures by aircraft size (-34.93 percent until November 2008), -9.82 percent in domestic seats by airport size through November 2008, the largest year over year seat reduction of -9.5 percent among the top 100 US airports, a huge number of domestic routes (routes flown 20 times) to be dropped by all carriers, along with domestic endpoints already dropped primarily by US Airways, Midwest Airlines, Delta and Continental.

“Airlines are struggling to cover their costs. They need all the money they can get. When it comes to charging fees for additional luggage and pillows, this is a way to align their costs wit the price of the ticket,” said Daniel M. Kasper, LECG LLC .

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