Airlines struggle for profits, a fare and a fee at a time
Travel • Most carriers still will have second profitable year in a row.

By JAD MOUAWAD

The New York Times

Published: October 22, 2011 04:28PM
Updated: October 22, 2011 04:26PM
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(AP Photo/David J. Phillip, file) An FAA advisory committee has voted to recommend allowing airline passengers use their smartphones, tablets and other electronic gadgets during takeoffs and landings But the soonest FAA is likely to implement new regulations is early 2014.

The same things making many air travelers grumble these days — rising fares with more and more fees, fewer flights, planes filled to the brim — are the things giving airline executives a reason to breathe easier.

After a decade of losing money because of cutthroat competition, slumping traveler demand and volatile fuel prices, the industry has found a way to regain some control of its fortunes — and make money — by shelving its 1990s strategy of aggressive growth. Despite the weak economy, most domestic airlines will have their second consecutive profitable year in 2011, after losing $55 billion since 2001. The one exception is American Airlines, which reported another quarterly loss last week (Southwest was off slightly, as well, because of fuel costs).

American trails its top rivals after being left out of the major mergers that have consolidated the industry. The mergers allowed the biggest airlines to cut service to many smaller markets, ground unprofitable flights and focus on their most profitable hubs. With fewer airlines competing to make their seats the cheapest, they could increase fares.

The nation’s top five airlines, including joint figures for United-Continental and Southwest-AirTran, accounted for 85 percent of all domestic seats in 2010; that compared with a 64 percent share for the top five in 2000, said Hunter Keay, an aviation analyst at Wolfe Trahan & Co.

“This has been an incredible picture over the past three years,” Keay said. “It’s not rocket science. Airlines finally understand basic economics. It’s supply and demand. It’s fear-based discipline.”

With fewer scheduled flights, planes are now fuller than they have ever been. The percentage of filled seats on international and domestic flight rose to a record high of 81.9 percent in 2010, compared with 72.9 percent in 2000, according to figures compiled by the Bureau of Transportation Statistics. And that number does not entirely capture how full most flights are to the most popular destinations at the most desirable times.

Meanwhile, the flight experience has worsened, as the big airlines have reduced service and stopped providing free meals or even blankets and pillows on flights. Legroom shrank on many of the low-cost airlines.

Domestic fares, which have risen in recent years, averaged $337 last year. Adjusted for inflation, they are still nearly 30 percent lower today than they were in the mid-1990s, but the fare is only part of the price passengers pay today.

The airlines now generate extra revenue from passengers by charging for a variety of services and goods, including checked bags, priority seating and onboard items like food, television and blankets.

The fees can be confusing, with little consistency across airlines. Some airlines charge extra for exit row seats or to sit in the first few rows of coach. Some apply cancellation charges. Some provide satellite television free; others charge for it.

The new revenue has provided a critical shot in the arm and helped airlines cushion the impact of fuel costs, which now account for about 40 percent of the industry’s fixed costs, up from 30 percent before 2005.

In 1990, tickets accounted for 88 percent of the airlines’ passenger revenue. In 2010, that share dropped to 71 percent. The new revenue accounted for most of the difference. Bag fees alone brought in revenue of more than $784 million in the first quarter — out of total revenue for the industry of $43 billion.

The airlines had little choice. In the decade after the Sept. 11 attacks, 41 airlines filed for bankruptcy. And the industry is still under significant stress. A slower economy could force passengers, especially business travelers, to travel less. Global business travel, which had been rebounding, fell in August compared with the same month last year.

Airline shares have suffered this year as a result of economic uncertainty. American Airlines has been particularly hard hit because of growing investor concerns that it cannot weather yet another slump in travel and may have to file for bankruptcy protection, something it has persistently refused to do.

While many aviation executives and analysts say most airlines have a more solid financial foundation, they remain cautious, given how fragile the recovery has been.

“It’s like the TV show ‘The Biggest Loser,’ where you just lost 25 pounds but you still weigh 220,” said Steve Lott, a spokesman for the Air Transport Association, the trade group. “You might still be declared a winner, but are you really fit? I think we have a long way before we regain our financial health.”