Airlines Need a New Approach

Back in May, Michael Palumbo, then Delta Air Lines' (DAL) chief financial officer, cautioned that no commercial airline business model works when crude oil costs between $50 and $60 a barrel.

At the time, oil was trading around $49 a barrel, but executives feared it would rise again to the mid-$50 range.

Now that crude has established itself around $65, it raises the question of what's next for the beleaguered airline industry.

Something else has to give, say analysts. That something might be more bankruptcies, more fare hikes, or cost-cutting. However, each has its limits.

While some argue that bankruptcies would be beneficial because they would cull the weaker hands from a crowded industry, UAL's (UALAQ) United Airlines and US Airways (UAIRQ) have shown that airlines can continue flying for a long time under Chapter 11, keeping capacity in the system.

Meanwhile, fare hikes will cause passenger demand to slacken. And most airlines have already made significant progress chopping expenses -- sometimes at great pain to workers -- so further cuts may be more difficult to come by.

"There are only so many times you can go to employees for lower wage rates," says Helane Becker, airline analyst at the Benchmark Co., a New York-based brokerage. "The industry has done a great job of cutting nonlabor costs ... I look at that and say, there needs to be a way to address the higher costs. If fares go up, that will address costs, but it will tamp down traffic."

So what has been described as an industry death spiral may continue.

There has been some positive news, as revenue has been rising on strong summer traffic and a series of fare increases by major carriers. Recently, American Airlines parent AMR (AMR) hiked fares on international flights by $20 round trip, citing fuel costs.

Even Southwest Airlines (LUV), which lifts fares less frequently than rivals, has gotten into the act, boosting fares between $2 and $4 one way.