Airlines studying flight cuts, grounding planes to deal with higher oil prices

Evolution of oil price

As airlines push airfares higher to counteract surging oil prices, they also are dusting off the flight plans they crafted to navigate 2008's fuel spike, when crude peaked at $147 per barrel.

United, Delta and American airlines are raising fuel surcharges on overseas flights to levels not seen since 2008 and are laying plans to ground fuel-guzzling aircraft and prune seat capacity, with the deepest cuts coming after the peak summer travel season.

Carriers realize they can't hike fees and fares indefinitely without alienating consumers. So they're looking at ways to curb fuel costs and trim unprofitable flights as oil hits the stratosphere. As in 2008, Chicago-based United is charting the deepest cuts among its peers.

While United intends to hold capacity flat for 2011, the world's largest carrier is planning to reduce its domestic flying by 5 percent during the fourth quarter, United told employees this week. Regional subcontractors will bear half of those cuts.

"Although we've raised our fares recently, we aren't fully recovering our increased costs, and higher fares reduce demand," United CEO Jeff Smisek said in the communique. "As a result, we need to reduce our capacity and allocate our aircraft carefully to markets where we can make money."

If rising oil prices send the U.S. economy into a tailspin, other carriers will ratchet down domestic capacity to keep prices high and avoid flying half-empty jets, analysts predict. So far, Delta and American have trimmed growth plans for the year but haven't announced plans to cut capacity below 2010 levels.

For now, carriers have plenty of pricing power. While airlines have raised domestic airfares by about 25 percent from prior-year levels, travel analyst Rick Seaney expects planes to remain full and prices to stay high for the next few months, regardless of what happens in the Middle East.

"If you're planning a trip for March, April or May, you'd better lock in, and be prepared to hold your wallet in some cases," said Seaney, CEO of FareCompare.com.

Leisure travelers planning summer trips within North America should wait until late this month to purchase their airline tickets, on the outside chance that oil prices stabilize, Seaney said. Chicago travelers plotting July trips to Paris and London should also wait to see if there is any relief from fares approaching $2,000 round trip.

"It's the highest I've tracked in 10 years," he said.

Navigating a world where crude oil trades north of $100 per barrel isn't nearly as disconcerting to airlines, or their customers, as it was three years ago.

"People understand it," said William Baker, partner with Chicago executive recruiter Baker Montgomery. "There have been so many other problems."

U.S. carriers learned that they could control their own destiny by capping capacity so that markets weren't flooded with cheap seats. They also looked to a host of new fees, including for baggage, that generates greater profits than flying, an estimated $9.2 billion in 2010, according to the Consumer Travel Alliance. And they started preparing for the next fuel spike.

"I think it's fair to say the industry as a whole is getting smarter about how to deal with these situations," said aviation economist Daniel Kasper.

Added airline analyst Michael Derchin, of CRT Capital Group, "They were better prepared for this than they've ever been."

Following the October merger of United and Continental airlines, the carriers' parent created the Fuel Council to look for ways to reduce fuel consumption, which exceeded 9.6 billion gallons in 2010. Every $1 increase in the price of a barrel of oil costs United an extra $100 million on an annualized basis.

The council is looking into hundreds of initiatives, focusing on those that could provide immediate savings, said Alex Marren, senior vice president for operations control and United Express for United Continental Holdings Inc., the parent company of the combined carriers.

Borrowing a practice at Continental, United is outfitting 52 Boeing 777s with tweaked software and hardware that lead to reduced drag on the jets' wings and trim the fuel burned by wide-body jets by 1 percent. That adds up to a savings of 5 million gallons of jet fuel annually, or about $18 million, at United's current prices.

Other initiatives under way include "tankering," or directing aircraft to top off at airports where fuel is cheapest. United ferried fuel on about 20,000 flights in 2010, saving more than $2 million, Marren said.

"It's all about being smarter," Marren said.

Texas-based American also has a program aimed at conserving energy, known as Fuel Smart. The 5-year-old initiative saved the airline 123 million gallons in 2010, or $285 million, said Sean Collins, an American spokesman.

As in 2008, United, Delta and American are studying parking inefficient aircraft and shifting more flying to newer, fuel-sipping planes. American is gradually replacing its fleet of 224 aging MD-80s with Boeing 737-800s that burn 35 percent less fuel.

American won't disclose how many of the 20-year-old jets it intends to park this year, but the planes give it "significant flexibility should we determine that a change in how much flying we do is an appropriate response to the current environment," Collins said.

Atlanta-based Delta is accelerating the retirement of its DC-9 jets, which have an average age of 34 years. The carrier has also shed more than 200 50-seat jets and turboprops since 2007 in favor of larger, more fuel-efficient mainline jets, said Delta spokesman Trebor Banstetter.

United hasn't disclosed which jets it is considering parking in the fourth quarter. But its pilots union leaders point out that, as in 2008, the oil spike could be a distant memory by the time the capacity cuts announced Monday are slated to take place.

"This is the airline industry," said Capt. Jay Pierce, who heads Continental's pilots union. "I'll believe the (fourth quarter) actions when we're in (the third quarter)."

Added Wendy Morse, his union counterpart at United, "I think the company has maintained the flexibility to move in the other direction should things change."

Source : http://www.chicagotribune.com/business/ct-biz-0311-airlines-oil-20110310,0,638066.story