Air Transport World

The 'low-hanging fruit.' (airlines have achieved the easy cost reductions and now face greater challenges)

Big U.S. airlines have been promising - and not achieving - cost cuts for so long that many people gave up waiting. But in a department parture from their usual market-share-is-all game, they have made some cost-reducing progress of late. To some, though, the strides represent more tinkering around the edges than major gains. More important, they wonder, if costs weren't really slashed during the 1990-92 recession, when will they ever be?

Indeed, managers are having a tough time arguing their case in the face of record profits this year - an expected 7%-plus industry operating margin, or $5.5 billion in operating income compared with $3 billion last year. That and the end of Continental Lite have some managers and employees believing their woes are over. U.S. Transportation Secretary Federico Pena thought results were so terrific he recommended airlines no longer receive the 4.3[cents] fuel-tax exemption.

This despite the fact that 1995 may be the high point in a brief string of profitable years. Even currently optimistic equity analysts are cautious. Says PaineWebber's Sam Buttrick: "The low-hanging fruit [easy cost cuts] has been plucked." in the third quarter 1995, for the first time in a year, he points out, industry seat-mile costs rose.

As a result, he is "unwilling to bet on sustained profit growth after a [projected] peak in the second or third quarter of 1996." A debt analyst, eying the traffic slowdown, suggested: "We're not exactly in boom times, despite record profits. The only thing saving this industry is a bit higher yield." That will be threatened if domestic traffic continues to slow, as it did last summer, or go down, as in September. Airlines will have less ability to compensate through capacity cuts and fare increases, as they did this year.

Edmund Greenslet of ESG Aviation Services says: "... For the ... largest carriers, there is almost no surplus [capacity] as of the end of 1994." That's why Buttrick estimates U.S. capacity will increase 2.7% in 1996, compared with 1. …

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