Oil up, airfares up

Big U.S. airlines, which have been attempting to claw their way back to financial health after shedding costs in bankruptcy, now find themselves in another downward spiral as oil prices broke through $130 a barrel this week.

Their short-term solution to the oil crisis: charging more to fly.

American Airlines and Delta Air Lines on Friday matched domestic fare increases of as much as $60 per round trip that were initiated by United Airlines. Northwest Airlines was considering the fare increase.

And beyond boosting fares and fuel surcharges, airlines also are ratcheting up fees to change flights -- $150 at many airlines -- or to check bags. Charging $25 for a second checked bag has become almost standard, and American this week announced it would begin charging $15 for the first bag for many passengers.

It isn't simply the Big Six network airlines that are raising prices to survive the spike in fuel costs. Low-fare airlines also are increasing fares.

AirTran Airways raised fares this week by $15 to $25 each way. In response, Eagan-based Northwest said Friday that it matched AirTran, as did many other competitors.

"Travelers flying over 1,500 air miles one-way between markets without a low-cost carrier have seen their airfares jump by $340 round-trip in the past five months," Tom Parsons, CEO of www.bestfares.com, said Friday in an e-mail.

If the fare increase launched Thursday night by United sticks, it will become the 12th successful fare increase since December, Parsons said.

Such hikes could keep many Americans at home. "I don't think that the airlines have yet gotten a very good feel for how much raising rates could potentially destroy [passenger] demand," said Bill Hochmuth, a senior research analyst for Thrivent Investment Management in Minneapolis. "But I don't think that it will take much more time to get that sense, given how much pricing is up."

But the ticket price hikes are not keeping pace with the unprecedented run-up in the price of jet fuel.

Wall Street analysts released reports this week that projected a profitable 2008 for Southwest Airlines, but wider losses than they earlier estimated for nine other big airlines.

Northwest, Delta, United and US Airways all restructured in bankruptcy in the years after the 2001 terrorist attacks, which caused a decline in passenger demand.

"The sense that we had coming out of 9/11 was that it was only a matter of time before we saw some type of recovery," Hochmuth said. "But now, as we look at oil prices, we don't know when the recovery will come."

Wall Street concurs, sending industry stocks down even further in Friday trading.

Northwest and Delta each fell to 52-week lows.

Northwest closed at $6.02, down 32 cents. About a year ago, after Northwest emerged from bankruptcy, its stock was trading at $26.50 per share. Delta fell 27 cents Friday, to $5.50. In July it traded at $21.80.

Cutting back more

Many industry analysts contend that one-fifth of the seats in the U.S. domestic market should be cut.

"The current business model is not sustainable at oil price levels above $130 a barrel," said Calyon analyst Ray Neidl in a research report. "We believe that a minimum of 20 percent of domestic capacity must be removed, the equivalent of the domestic capacity of US Airways, Continental and Frontier Airlines combined."

This week, American said that it would shrink its domestic schedule this fall by 11 to 12 percent.

Northwest, which is still expanding its international operations, announced in April that its domestic operations in the fourth quarter would be 12.6 percent smaller compared with a year ago.

But Northwest signaled this week that more cutbacks are coming.

"In view of the massive run-up in the price of fuel, we have no choice but to look at additional capacity reductions," said Tammy Lee, Northwest's vice president of corporate communications.

Northwest had planned to take two DC9s out of service in June, and cut its mainline fleet by as many as 15 to 20 planes by the fourth quarter.

After watching oil hit new records this week, Lee said: "Airfares must increase to offset these sustained high fuel prices. We anticipate consumer demand will decrease, which could result in further fleet reductions."

Working the Hill

Since unveiling their merger proposal in mid-April, Delta and Northwest executives have made multiple trips to Capitol Hill to argue that through a combination they could create an airline that would withstand high oil prices over the long haul.

But now industry insiders are scrutinizing the cash balances of the two, and some wonder whether they will be able to afford the $1 billion or so in merger-integration costs.

Credit Suisse analyst Daniel McKenzie indicated Friday that he expects Delta's acquisition of Northwest to close successfully.

McKenzie estimated that Delta would end 2008 with a cash balance of $2.6 billion, while Northwest would have $2.3 billion. Delta has access to a $1 billion revolving credit line, while Northwest's credit facility is only around $100 million.

The Department of Justice is reviewing the merger proposal, and is expected to offer a decision before the end of the year.

Liz Fedor • 612-673-7709