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Higher fares, more fees, in store for airlines, CEOs say

Travelers can expect fares and fees to continue to rise, while airline employees will endure more layoffs as the major carriers shrink even more than expected later this year as they grapple with record fuel prices.

Several top airline officials, including the chief executives of American and Southwest airlines, painted a dismal picture of the industry’s fortunes at a conference Wednesday. Several carriers, including Northwest and Delta, announced additional cuts to cope with the worsening conditions.

“The airline industry environment is terrible,” said Gary Kelly, chief executive of Dallas-based Southwest. “We have soaring energy prices and a very weak economy.”

The Air Transport Association estimated that the U.S. airline industry could lose $13 billion this year. Oil prices remained persistently high, topping $136 per barrel Wednesday.

Among the day’s developments:

  • American Airlines, headquartered in Fort Worth, will spend more than $10.2 billion on jet fuel this year, compared to $6.7 billion a year ago.
  • Gerard Arpey, the airline’s chief executive, said he expects fares to continue to rise and warned customers may see even more fees for services that had previously been provided at no additional cost.

    “I think unbundling things like baggage fees are particularly important for our industry,” he said. “I think you’ll see more of that going forward.”

  • Southwest, the nation’s largest low-fare carrier, has slowly raised fares in recent months and anticipates further price increases. “We’re going to have to move fares along gradually and continually to get over these dramatic fuel costs,” Kelly said.
  • Continental Airlines, which has long resisted charging extra fees on items like in-flight food, said it was considering a fee for the first checked bag. American, United and U.S. Airways have all begun charging $15 each way to check a single bag.
  • Northwest Airlines said it will slash more capacity later this year, cutting its service by up to 10 percent in the fourth quarter, which will mean job cuts.
  • The airline also said it would increase fares and fees, although it did not disclose any details of the price increases.

    “This will allow us to better match our capacity to customer demand as airfares, by necessity, must increase,” said Doug Steeland, the airline’s chief executive.

  • Delta Air Lines also increased its plans to cut capacity, announcing that it will shrink by 13 percent in the fourth quarter.
  • “The bear case for airlines is playing out, high fuel prices and weak demand,” said Kevin Crissey, an airline analyst with UBS, in a report issued this week.

    “Historically, this has led to bankruptcies of several major carriers,” he added. “We think if nothing changes for the better with regard to demand or fuel prices, this will be the case again.”

    Shares of the major carriers fell on the latest round of grim news. Shares of AMR Corp., American’s parent (ticker: AMR), dropped 24 cents, or about 4 percent, to $5.46. United Airlines (ticker: UAUA) dropped 45 cents, or about 6 percent, to finish at $6.55 per share, and U.S. Airways (ticker: LCC) fell 26 cents, about 8 percent, to $3.

    Southwest shares (ticker: LUV) fell 16 cents, or about 1 percent, closing at $14.14 per share.

    Arpey said American may speed up the retirement of its MD-80 airplanes, which aren’t as fuel-efficient as newer jets. The airline also is considering accelerating the retirement of its Airbus A300 planes, “given the current environment,” Arpey said.

    In a rare positive development, Arpey said American did see a 7 percent increase in unit revenues during the second quarter, driven by higher fares.

    “In spite of our continued concerns about the economy, our revenue results have held up reasonably well,” he said.

    Still, he acknowledged that the revenue jump did not come close to keeping pace with the “meteoric rise” in fuel costs.

    American had previously announced that it will cut its overall capacity by up to 12 percent in the fourth quarter, a move expected to cost thousands of jobs. The airline is the largest employer in North Texas, with more than 20,000 workers based here.

    Southwest, meanwhile, said it would continue its modest growth plans for the year. Most analysts expect that the airline will be the only large carrier to report a profit this year, thanks to the carrier’s fuel hedges. Those contracts allow the airline to purchase 70 percent of its jet fuel at prices that reflect oil at $70 per barrel.

    Still, he said, the airline is unlikely to consider any major expansion, particularly one that comes from an acquisition of another carrier.

    “We are not thinking seriously about an acquisition,” Kelly said. Still, he added, “Southwest is prepared to weather this storm.”

    TREBOR BANSTETTER, 817-390-7064

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