Tue February 8, 2011

Winter Weather Grounds Airlines' Profits

Analysts say this winter's storms may have already cost airlines more than $6oo million, as tens of thousands of flights were cancelled from Boston all the way to Austin, Texas. Adding to their difficulties, airlines are also grappling with rising fuel costs.

The new challenges come as the industry was celebrating its best profits in a decade that began with the attacks of Sept. 11, 2001, and continued through the economic recession. In 2010, people were finally starting to fly again, airlines were getting new revenues from fees on everything from chips to checked bags, and things were starting to take off. That is, until hopes for 2011 were frozen in their tracks.

"The bad weather that we've experienced is going to make for an ugly first quarter," said Daniel M. Kasper, an airline economist at LECG in Cambridge, Mass.

He says that taken alone the weather might have been just a bump in the road. But the pain is compounded right now by the rising cost of jet fuel spurred most recently by the crisis in Egypt.

Fuel prices have jumped more in one month than it usually does in a year, says John Heimlich, chief economist with the Air Transport Association. Because fuel is such a huge part of airlines' operating costs, Heimlich says, an extra $10 a gallon, for example on the millions of gallons airlines use, adds up to more than the industry's entire 2010 profit margin.

Indeed, Giovanni Bisignani, head of the International Air Transport Association, says the industry is nowhere near robust enough to absorb that kind of hit.

"Our margins ... are still pathetic," he said. "We remain a very sick industry."

In the long term, more fuel-efficient aircraft will help. But airlines are already looking at taking more immediate steps. Delta, for example, announced recently that it's cutting some less profitable flights and retiring some old aircraft. Delta President Ed Bastian warned that if fuel costs remain at current levels, Delta would "need to raise ticket prices to cover that cost."

Industry analyst John Pincavage of Pincavage & Associates says airlines will also be looking for more cost-cutting measures. Even things such as free space in the overhead storage bins may no longer be free.

"They've gotten the low-hanging fruit," Pincavage said. "Now every year it gets harder to try to offset cost increases."

There is one possible silver lining, at least this year: The brutal winter may increase demand on snowbird flights to Florida, for example. That could help boost airline revenues a bit. That is, as long as the planes can take off. Copyright 2011 National Public Radio. To see more, visit http://www.npr.org/.