The nation's airlines have posted operating losses north of $22 billion since the start of 2001. And the flood of red ink at the heart of the brewing showdown between Northwest Airlines and its mechanics union shows no sign of stopping soon.
Most airlines saw their per-gallon fuel costs jump by more than a third in the first quarter of this year. And fuel costs have continued to rise as oil prices hover near $60 a barrel.
So, what has happened to fares? Well, they've plunged, on average.
At Tennant Co., a Golden Valley floor maintenance equipment manufacturer, employees are flying for about 20 percent less than they did in the fourth quarter of 2004.
"We are seeing record low fares," said corporate travel manager Marty Wahoske. "It's a very illogical, commodity-type business."
The lack of pricing power by airlines is a huge factor in their continuing losses, which are inflaming battles with unions over billions of dollars in wage and other givebacks and threatening to send more airlines into bankruptcy. And there's the risk that more carriers racking up huge losses will follow the lead of United and US Airways and dump their hugely underfunded pension plans, perhaps requiring a taxpayer bailout of the agency that insures the plans.
Low-fare airlines are setting pricing for their "legacy" rivals, such as Eagan-based Northwest.
"Southwest and other low-fare carriers are the price setters,'' Northwest CEO Doug Steenland said during an appearance at the University of Minnesota's Carlson School of Management last week. "If we raise fares and they don't match us, we have no choice but to roll them back."
Some travelers will pay a premium for nonstop service, assigned seats, flight frequencies and other benefits. But many won't. To save even just $10, some consumers will opt for a one-stop flight on a low-fare airline.
"A good number of customers have told us loud and clear that what they value more and more is price," said Steenland.
Legacy carriers face quite a conundrum, says John Pincavage of the airline consulting firm Pincavage & Associates in Westport, Conn. They haven't been making money with the fares they've been charging. But if they raise fares, they fear gains from fare increases may be exceeded by revenue losses from customers who choose to book lower-priced tickets on other carriers.
"It's a war of attrition,'' said Pincavage. "The guys who need the price increases the most have the biggest costs. Meanwhile, the low-fare carriers don't want to or don't have to raise fares."
Legacy carriers are constrained by higher labor costs, restrictive work rules, huge pension-plan obligations and other trappings of the days of heavier government regulation. Upstart low-fare carriers are not.
The downward spiral of fares is often masked by the taxes and fees that can now account for a quarter or more of the price of a ticket. But airlines' domestic yields what they get per mile for flying passengers averaged 12.06 cents last year, down from 14.57 cents in 2000, the last good year for most airlines. On an inflation-adjusted basis, the carriers' average domestic yield in 2004 was the lowest on record, the Air Transport Association estimates.
Yields for Northwest, United and other "network" carriers fell about 6 percent in the first quarter of this year, compared with the same quarter in 2004, according to the Bureau of Transportation Statistics.
Based on what corporate travel managers are saying, fares in the second quarter were running as much as 10 percent lower than they were in the second quarter of 2004, said David Beckerman, director of consulting services for Back Aviation.
At best, recent fare increases that have "stuck" have offset only half of a $16-a-barrel spike in crude oil prices. That's what Mark Streeter, managing director of J.P. Morgan Securities, told Congress last month.
Overall, fares are running at late 1980s levels, reports the Air Transport Association. A fourth of all domestic passengers now pay $200 or less, including taxes, for a round-trip ticket; two-thirds pay $300 or less.
To be sure, fares on routes with little or no competition can still be pricey, if not outrageous, in the view of many travelers.
"I had intended to fly to Calgary,'' said Sharron Thomson of West St. Paul. "But it was close to $1,000."
Fares are typically soft, however, where old-line carriers such as Northwest go head-to-head with low-fare carriers such as Southwest, ATA, AirTran and Jet Blue.
The bankruptcies of United and US Airways have also played into the downward spiral of fares. Air carriers involved in reorganizations usually discount fares substantially to maintain cash flows and enhance continued customer loyalty, Northwest has said in SEC filings.
In the Twin Cities, low-fare competition certainly is not what travelers will find in markets such as Chicago. Other than Northwest, no carrier has more than three gates at the Minneapolis-St. Paul International Airport.
Still, Northwest faces low-fare competitors on 69 of 141 domestic routes on which it provides nonstop service. (Low-fare carriers offer a mix of nonstop and one-stop service on the 69 routes.)
Overall, 87 percent of Northwest's Twin Cities customers could fly a low-fare carrier to their destinations, Northwest says.
With the Internet, consumers can hunt down the lowest fares with just a few mouse clicks. That, of course, puts more pressure on carriers to compete on price.
"By and large, people view air travel as a commodity,'' said Tom Bach, Northwest's vice president of network planning and revenue management. "They say, 'I will get to Florida safely and with my bags with just about anybody. Who's the cheapest?' ''
In most cases, Northwest has matched or reduced fares on routes where it has low-fare competition. Northwest's domestic yield in the first quarter of this year fell by about 8 percent, compared with the same quarter in 2004. Meanwhile, its fuel costs rose 40 percent in the quarter and they're still rising.
On some routes, such as Twin Cities to Dallas, fares have truly plummeted in response to Delta's Simplifares initiative, which capped most walk-up fares at $499 one-way in January.
In response to Delta's move, Northwest dropped its one-way walk-up fare from the Twin Cities to Dallas from $752 to $499.
Competition from Mendota Heights-based Sun Country subsequently caused Northwest to introduce a walk-up fare of $213. With a three-day advance purchase, that fare is now $98 one-way, including some but not all taxes and fees.
In its first-quarter earnings conference call, Northwest indicated that Delta's fare actions would cost Northwest a "couple hundred million dollars" in annual revenue.
Why did Delta do that?
The airline faces much more pressure from low-fare carriers, according to industry wonks. AirTran's hub is in Atlanta. And Florida, which provides much of Delta's revenue, is a hotbed of low-fare competition.
Scott Rohlf knows he's getting a pretty good deal when he flies from Orlando to the Twin Cities to visit family.
He paid about $300 for a round-trip flight this month, about $50 more than he did a year ago. But he still finds fares are lower than they were five to 10 years ago.
"They're higher than they were a year ago because of oil,'' he said. "But they're quite a bargain, even with the fare increase."
And sales make them even more of a bargain. Last month, you could buy a Twin Cities-Orlando round-trip ticket seven days in advance for $199 on ATA and $232 to $243 on AirTran, Northwest or Sun Country. Those prices include $24 to $47 in taxes and airport and security fees.
"The average fare has to increase or we'll lose some airlines,'' said Minneapolis-based travel expert Terry Trippler. "You do not sell your product for less than it costs you to make it. But the airlines don't seem to catch on to that. They all must have missed the same day of school."
Northwest and other carriers have tried and failed seven times this year to increase the $499 one-way walk-up fares implemented by Delta and reluctantly adopted by rivals in January.
Industry price increases, when successful, have often been undone by sales that soon follow.
Prices could firm up if airlines put fewer seats in the air, said Vaughn Cordle, chief analyst with Airline Forecasts LLC and a pilot with a major airline. It's basic economics. Lower the supply, increase the price.
If domestic capacity falls by 10 percent to 15 percent, airlines might get some serious pricing leverage and offset more of the spike in fuel costs.
It won't be long, Cordle suspects, before the airlines with the worst balance sheets and greatest losses have to pull down domestic capacity to stem their losses.
To make a little bit of profit, the industry would have to see a 9 to 10 percent increase on fares overall, he estimates.
"The guys who are winning are the guys with the deep pockets, Southwest,'' he said.
Of course, Southwest has a great edge because, unlike most other airlines, it bought contracts that assure it now gets fuel well below market prices. It has hedges on 85 percent of its fuel needs this year at a mere $26 a barrel of oil. That's its price, even if oil, now trading at about $60 a barrel, tops $70.
Pincavage dismisses talk about too much domestic capacity. The problem is there is too much high-cost domestic capacity, in his view. Carriers need to lower their costs so they can make money in today's low-fare marketplace, he thinks.
That's the course that Northwest is trying to follow. It's pressing its unions to provide $1.1 billion in annual wage and other labor cost savings.
Northwest and other legacy carriers should be more concerned, though, about making money than holding market share, said Darryl Jenkins, a visiting professor at Embry-Riddle Aeronautical University and an industry consultant.
The old-line network airlines often overreact to low-fare challengers, cutting prices on more seats than necessary, matching low-fare seats by up to a 20-to-1 margin in some cases.
They also fail to capitalize on the power and value of their national and international networks to compete more effectively, said Jenkins.
"The whole thing about legacy carriers is that they fly everywhere,'' he said.
Legacy carriers have no one to blame but themselves for getting into this pricing mess, he said.
"This,'' said Jenkins, "is not what I would call a case study I'd want my students to read and follow."
