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Airlines Cope With
Oil-Enforced Austerity

The rising price of oil has been devastating for the airline industry, causing costs to soar and fueling industry losses at a time when results should be stronger. But $40-plus oil may also be the best thing that could happen to the industry, forcing carriers to slim down or go belly up.

Every time the price of a barrel of crude oil increases by $1, the industry's costs increase $425 million, according to research from Bear Stearns. And with at least three carriers -- Delta Air Lines (DAL - Get Report), Northwest Airlines (NWAC) and US Airways (UAIR) -- actively pushing for employees to cut their own pay, chronically high fuel costs have shortened the amount of time they have to seek concessions, while deepening the amount they're asking for.

"Unsustainably high jet fuel prices could, in fact, be good for the industry," said Susan Donofrio, analyst at Fulcrum Global Partners, in a research report. "While we concur with labor that the current bloated cost structures at many of the airlines [is not labor's] fault, we still think that the numbers show there is the need to become more competitive."

The Second Quarter and $40 Oil

Second-quarter results at the carriers currently seeking concessions drive home this point.

In the three months ended June 30, Delta announced an adjusted loss of $312 million, which was $75 million worse than last year, despite the fact that Delta was grappling with a war in Iraq, SARS and a weaker economy in 2003. While the company saw sales rise, expenses rose even faster, jumping 23.7% on a 53.8% increase in fuel costs.

Labor costs were down marginally in the second quarter, but Delta's labor costs were high to begin with. According to Donofrio, Delta has the highest pilot costs in the industry, coming in at $527 per block hour, 67% higher than the industry average. With losses mounting, something has to give, and since Delta cannot control oil prices, it has turned to labor as the first step in an ambitious plan to perform a top-to-bottom restructuring of its business.
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