Transcripts

AirTravel Is Losing Class

PAUL KANGAS: New figures show the number of international airline passengers traveling in first or business class fell sharply in March, the biggest drop since 2003. That's bad news for airlines which count on passengers in the front of the plane to pay premium prices. The sector is already struggling under the weight of high fuel prices. As Diane Eastabrook reports, some experts say the industry needs to take a fresh look at how it does business.

DIANE EASTABROOK, NIGHTLY BUSINESS REPORT CORRESPONDENT: Three decades of airline deregulation have brought U.S. consumers more airlines, more destinations and more discounted fares. Analysts say in this type of environment, carriers can only turn a profit if crude oil is cheap. But that's not the case now. Jet fuel prices are nearly $170 a barrel, more than double year ago levels. Fitch Ratings airline analyst William Warlick says airlines must raise fares substantially over the long haul to cover higher fuel costs. But even he admits that is something the industry has had difficulty doing in the past.

WILLIAM WARLICK, AIRLINE ANALYST, FITCH RATINGS: That's historically been a problem in this industry and it differentiates in many ways from other transportation industries such as rail and trucking, where you do have explicit fuel surcharges. That has not existed in this industry and it's a problem now. And obviously when you try to recover higher fuel costs through higher fares, it has a fairly dramatic effect on demand.

EASTABROOK: While consumers haven't been getting a free ride on airlines in recent years, it can be argued they've been getting a fairly inexpensive one. Since 1990 yields or the price passengers pay to fly one mile, have been relatively flat. Airlines have taken some measures to recoup costs in recent months. They've increased fares incrementally and some have tacked on baggage fees. Joseph Schwieterman studies the transportation industry for DePaul University's Chaddick Institute. He says a wholesale restructuring of fares is necessary. While government intervention might accomplish that, Schwieterman thinks regulating the airline industry again would be a bad idea.

JOSEPH SCHWIETERMAN, DIRECTOR, CHADDICK INSTITUTE: You can only imagine the red ink that would be generated if we have to wait two or three months for a decision from Washington to change fares. Let's hope we don't go in that direction.

EASTABROOK: Experts think market conditions will eventually resolve the fare issue. They say if crude oil remains high, one of more carriers are likely to file for bankruptcy. Schwieterman believes the liquidation of a large carrier could reduce capacity enough to put a floor under ticket prices.

SCHWIETERMAN: We are back to this discussion again, do we have one or two too many carriers and we saw that debate a few years ago. But right now the evidence is almost overwhelming that either the entire industry, assuming fuel prices don't come down, cuts back in double digit fashion or one carrier may be one carrier too many.

EASTABROOK: Analysts say if oil prices remain at their current levels into the fall, then the liquidation of a major U.S. carrier could come by early next year. Diane Eastabrook, NIGHTLY BUSINESS REPORT, Chicago.