By Michael Arndt America's big airlines sure are a battered lot. Just 18 months after emerging from bankruptcy, US Airways Group (UAIRQ) filed yet again for Chapter 11 protection on Sept. 12, rejoining UAL (UAL) in bankruptcy. Delta Air Lines (DAL) may be the next to throw in the towel, perhaps as early as the end of the month. Meantime, almost every other hub-and-spoke carrier is hurrying to slash payroll costs before sky-high fuel bills and a nonstop fare war with discount airlines knock them out, too.
So executives at low-fare carriers must be pumping their fists in victory, right? Hardly. These once-unbeatable upstarts are also taking their licks. Four of the nation's top six low-cost airlines now concede they'll lose money in the current quarter, while the other two -- Southwest Airlines (LUV) and JetBlue Airways (JBLU) -- recently signaled that their earnings would fall short of forecasts. Moreover, Indianapolis-based ATA Airlines (ATAH) is so cash-strapped that analysts say it, too, could be bankrupt by yearend. Others almost certainly will follow, they add.
With their reduced costs for labor and overhead, low-fare carriers have a sizable edge over larger rivals. But that's no longer enough. Between surging fuel costs and penny-pinching travelers who balk at any hike in ticket prices, discounters are getting squeezed. Even labor expenses are climbing. And the majors are fighting back, copying the upstarts with simpler, lower fares -- and discount airlines of their own. To top it off, hurricanes have disrupted vacation travel to Florida, a key market for many discounters.
SEEING RED. Bottom line: Industry analysts now foresee the discount segment earning $149.9 million in the third quarter and $103.9 million in the fourth quarter, according to polling by Thomson Financial. Those estimates are down from profits of $192.4 million and $138.9 million that these same analysts had predicted three months earlier, when the industry's recovery seemed stronger.
It's little surprise then that stock prices of low-fare carriers are down 20% or more over the last year. "The dancing in the streets -- I don't think you're going to see that," says Jeff S. Potter, chief executive of Frontier Airlines (FRNT).
Record-high fuel prices are airlines' biggest headache, and the discounters are sharing the pain. Take America West Airlines (AWA). Despite hedges on 25% of its fuel needs, the airline paid $40 million more for fuel in the second quarter than it did a year earlier, all but erasing profits. With third-quarter prices even higher, America West execs calculate the fuel tab will be up $120 million for the full year. As a result, analysts now predict that the Tempe (Ariz.) company will be in the red for the remainder of 2004.
Likewise, New York-based JetBlue blamed higher fuel costs when it lowered its profit forecast on Sept. 8. And even Southwest, which has hedged better than any other airline, complains that its fuel bills are siphoning away earnings.
EXIT STRATEGY. The airline industry, of course, isn't the only one getting walloped by sky-high fuel prices. But unlike trucking companies and railroads, which routinely pass along added fuel costs through surcharges, airlines have had to eat the increases.
Why the difference? The industry has overshot demand by expanding capacity by an estimated 10% this year, with many of those extra planes coming from fast-growing discounters such as JetBlue and AirTran Airways (AAI). That means customers can play one airline against another by shopping the Internet, keeping fares below cost for all but the most productive carriers.
Even if fuel prices collapse to 2003 levels, the low-fare airlines wouldn't be the phenoms they once were. Newbies like JetBlue and AirTran have few legacy costs. But at the older discounters, labor expenses are escalating. In early summer, Southwest gave its flight attendants an average 31% raise over the next four years. And ramp workers at ATA just ratified a contract awarding them what are termed "substantial raises."
THINNING THE RANKS? Discount airlines are piling on debt, too, as they add planes. Frontier's long-term debt, for instance, has more than doubled since 2002, to $296.3 million, as it converts to an all-new Airbus fleet.
The airline industry may gain some leverage soon. Many analysts and executives think US Airways won't be able to restructure itself in bankruptcy a second time and will go out of business. That would instantly remove as much as 6.5% of domestic capacity. UAL also may be forced to trim its operations as it struggles to come up with a turnaround plan after 21 months in Chapter 11. And Delta is bailing out of its Dallas-Fort Worth hub.
The shakeout won't be confined to the legacy airlines. Despite recent setbacks, JetBlue and Southwest are good for the long term, analysts agree. But of the top six discount carriers today, only three have managed to hang on for 20 years. "I don't know that the world needs six of us," confesses America West Chairman and CEO W. Douglas Parker. Three, he adds, is more reasonable.
No doubt it's better to be a discounter in the airline industry -- but these days, even the best carriers are taking their lumps. Arndt is a senior correspondent in BusinessWeek's Chicago bureau