Unknown Course for Airlines in Hazy Time

With more than half of the nation's major airlines in bankruptcy, industry leaders and analysts have no clear consensus on what commercial aviation will look like in the future.

But most agree that big changes are coming, even after several years of often painful restructuring at the major hub carriers.

"The airlines have been in crisis in the past," Sen. John McCain, R-Ariz., said during a hearing last week on the effects of Hurricane Katrina. "But I don't think I've seen anything approaching this."

Delta Air Lines and Northwest Airlines filed for Chapter 11 protection last week, joining United Airlines and US Airways in bankruptcy. Two smaller carriers, ATA Airlines and Hawaiian carrier Aloha, are also under court supervision.

Of the so-called legacy airlines -- the hub carriers that date back before World War II -- only Fort Worth-based American Airlines and Continental Airlines, headquartered in Houston, are operating outside bankruptcy.

Most industry observers agree that all of the legacy carriers face further cost-cutting, which could include more wage cuts, layoffs and the elimination of pension plans.

But few claim to predict what the future business model of a successful airline may look like.

Some advise the big airlines to mimic successful discount carriers Southwest Airlines and JetBlue Airways. That would involve slashing back on hubs, flying more direct city-to-city routes, and focusing on popular routes while reducing service to smaller cities.

Others argue that the legacy airlines simply can't -- and shouldn't -- try to impersonate Southwest, and should focus on their international service, giant hubs and appeal to business travelers. They point out that without its fuel hedges, which allow it to buy jet fuel at lower prices, the Dallas-based carrier would be losing money as well.

And some predict that mergers and liquidations will shake the industry until only a few successful airlines remain. That consolidation could even include the creation of giant global airlines, if federal laws are changed to allow foreign investment in U.S. carriers.

"There's no clear understanding right now of how things are going to play out," said Ron Kuhlmann, vice president of Unisys R2A Transportation Management Consultants, an aviation consulting firm.

In some respects, these should be good times for the airline industry.

The summer travel season was one of the best in years. On average, many airplanes flew more than 80 percent full as tourists flocked to airlines as they haven't since before 9-11.

And the legacy airlines have seen some relief, albeit small, from the intense competition that has pushed fares to the cheapest level in years. A series of small fare increases in the fall and summer has boosted revenues.

At American, for example, unit revenues during the second quarter jumped 7 percent compared with the previous year.

But the rising cost of jet fuel has overwhelmed the revenue gains and several years of cost-cutting. Fuel prices have risen 239 percent over the past four years, according to the Air Transport Association, costing the airlines billions.

"No business model at any airline can survive sustained jet-fuel prices at this level," said James May, president of the Air Transport Association, an industry trade group, as he testified at last week's Senate hearing.

"The future is not bright," he said.

Delta and Northwest cited fuel costs in their bankruptcy filings.

"Oil is once again robbing the industry of a return to profitability," Giovanni Bisignani, chief executive of the International Air Transport Association, said last week. "Cost reductions and efficiency gains have never been more critical."

The fuel prices, which few expect to decline in the near term, lead some analysts to conclude that the industry's salvation lies in the lean structure of Southwest, JetBlue and AirTran Airways.