Winging It: Airlines' optimism is surprising

The last few weeks have provided few surprises for those of us who follow the fortunes of the airline industry.

US Airways and United were only the most recent major carriers to report, last week, hefty third-quarter losses because of both the sharp increase, and the precipitous decline, in the cost to fill their planes with jet fuel. The week before it was Delta, American and even perennially profitable Southwest.

A portion of the losses, and all of Southwest's red ink, were due to the airlines' fuel-hedging contracts, which they have used to lock in prices months or years ahead. Southwest reported profits earlier this year because its hedging meant it was paying less for fuel than competitors.

When oil prices drop below what airlines tried to guess they would be, some of those contracts required them to pay more for fuel than spot-market prices. Accounting rules require a write-down of the difference on a quarterly basis.

Note, however, that I didn't say there were no surprises. For me, one was how upbeat some airlines, especially US Airways, and the Wall Street analysts who track their performance seem to be about 2009. They say that unless oil prices spike again, they believe they have raised fares enough, and reduced their costs enough by cutting flights, furloughing employees and parking planes, to lose a lot less, or even make money.

Among the reasons airlines are hopeful about 2009 is that most of them appear to have no intention of rescinding all of the fuel surcharges that they added to the price of tickets when costs were soaring. On international routes, some carriers have announced cuts in fuel surcharges.

But it's impossible to tell what's happened on all routes. For instance, the base round-trip coach fare between Philadelphia and London, without taxes and fees, was almost $1,000 this summer. It is just over $500 for travel next month.

Is that a normal season decline in fares, or is it because fuel surcharges were removed? It's probably both.

US Airways, in its third-quarter earnings conference call, cited other reasons to be optimistic about next year. CEO Doug Parker pointed out that the airline is running a much better operation than it did a year ago, at its Philadelphia hub and elsewhere. That, and its cost-cutting measures, helped US Airways secure $950 million in new financing that gives it a greater cushion to weather a serious downturn.

Parker and other executives also spent a good chunk of time on the call saying how pleased they were with the results of using "a la carte" pricing, the policy adopted by many carriers to charge extra for soft drinks, checking bags, reserving better seats or other services that once were free. For US Airways, the fees are expected to bring in an extra $400 million to $500 million in revenue next year - not bad for a company that was happy to make $177 million in the 2007 third quarter.

The US Airways leaders said they don't believe that the fees have prompted many customers to avoid the airline and instead fly on Southwest, which is running a marketing campaign centered on its no-fees policy.

What's more, Parker said, having fewer checked bags has cut down on lost luggage. And with only 25 percent of passengers now buying $2 soft drinks (compared with 95 percent who wanted one when they were free) flight attendants can get the beverage cart out of the aisle faster, giving them time to deal with passengers one-on-one if needed, he said.

If US Airways and other airlines really can make a good recovery next year, we should all be pleased. But the airlines seem to be expecting that the dismal economy causes only a modest decline in demand for travel, and that could be a dangerous assumption.

There are some warning signs that business travel, the industry's lifeblood, could fall sharply the rest of this year and next.

Two surveys released last week, by the Business Travel Coalition and the National Business Travel Association, indicate that many companies moved quickly this month to limit the number of trips their people make and how much they spend.

The companies also are planning to increase their use of the Web and video-conferencing to replace face-to-face meetings that have required out-of-town travel.

In the coalition's survey of corporate travel managers, two-thirds said they were keeping emergency cutbacks, made in the depths of the credit crisis, in place "until further notice," indicating deep uncertainty about the economy.

Mitchell pointed out, too, that any cuts in travel spending in coming months would be on top of reductions many organizations made earlier this year as the economy slowed and air fares increased.

"It's still extremely fluid," coalition chairman Kevin Mitchell told me. "Companies are still evaluating it."