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Bumpy ride expected for airline industry in 2005

By Marnie Hunter
CNN


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(CNN) -- The coming year holds a lot of uncertainty for airlines and passengers.

"There are just so many multiple factors that it's hard to see very far down into the future," said David Stempler, president of the Air Travelers Association, a Washington-based advocacy group.

With United Airlines and US Airways mired in bankruptcy and Delta struggling to stay out of it, continued turbulence seems inevitable for the industry's large legacy carriers (United, Northwest, Delta, Continental, American Airlines and US Airways).

Large airlines face increased competition from low-cost carriers while they continue to address labor costs. High fuel prices have squeezed the entire industry.

The big carriers are not the only ones struggling financially. Low-cost carrier ATA filed for bankruptcy in October and Independence Air may follow suit.

Some analysts predict one or more carriers could go under, which may translate to fewer seats at higher prices in 2005.

"Either one or more of the carriers will fail. That will eliminate some capacity, and of course when supply goes down, price goes up," said George Hamlin, director of Washington-area consulting firm MergeGlobal, Inc.

Aaron Gellman, a professor at the Transportation Center and the Kellogg School of Management at Northwestern University, foresees a slight increase in the domestic price structure.

"On average fares may rise modestly, but I think it will vary market by market depending on competition," he said.

Liquidation ripple effect

US Airways appears to be the most precariously positioned legacy carrier. The airline, in bankruptcy for the second time in two years, has warned it will begin liquidating assets in mid-January if the judge does not cancel union contracts and pension plans for groups who have not agreed to concessions.

Of the three groups whose contracts are being considered by the court, only a union for customer service agents has reached a tentative deal. No agreements have been reached with unions for flight attendants and machinists.

A US Airways liquidation early in the year would create a significant drop in domestic capacity, at least in the short run, said Bill Warlick, an industry analyst with Fitch Ratings.

While the drop would give other airlines some traction in raising fares, Warlick predicts a scramble for lucrative assets by other carriers that would fairly quickly restore much of the capacity in cities with heavy US Airways service.

The entry of multiple competing carriers into markets dominated by US Airways, such as Charlotte, North Carolina, could bring prices down substantially in those locations, he said.

"It'll be a case of city by city, if that does in fact play out, if US Airways goes down," Warlick said.

A shutdown also would mean significant disruption in schedules and customer inconvenience in hub cities such as Charlotte and Philadelphia and Pittsburgh, Pennsylvania.

Restructuring trend

United Airlines also has been negotiating with unions on wage and labor concessions since it filed for Chapter 11 protection in 2002 and has asked a judge to throw out contracts if cost-saving agreements cannot be reached. Delta is working on restructuring deals in hopes of avoiding a bankruptcy filing.

Flight attendants and other union workers at US Airways and United have threatened strikes if they lose their contracts.

"That, if it happened, could be devastating for a distressed carrier like US Airways or United," Warlick said. "You could see a pretty dramatic booking away [from the distressed airlines]."

But Warlick does not see striking as a large risk at this point because the legality of potential strikes still is unclear.

If United and US Airways are successful in streamlining costs and adapting to the low-cost carrier mold, the other large carriers likely will follow suit, said Joe Brancatelli.

Brancatelli, editor and publisher of a site for business travelers called JoeSentMe.com, believes the two airlines' bankruptcy judges will steer the future of the entire industry when they decide whether those airlines may cancel their union contracts and pension plans.

"If they allow that, the other four big airlines will have no choice but to go into bankruptcy too and try and do the same thing," he said.

Passenger strategy

So what is a passenger to do in these cloudy skies?

Stempler, with the Air Travelers Association, urges passengers to purchase tickets with a credit card. That way there is some recourse with the credit card company in the event of a significant disruption in service.

On Wednesday, Congress approved a reinstatement of legislation that protects passengers holding tickets for failed airlines. The provision, part of the sweeping intelligence overhaul bill, states that healthy carriers must honor tickets from failed carriers on a space-available basis through November 19, 2005. President Bush has vowed to sign the legislation into law.

Re-booking fees are limited to $50 roundtrip and ticket holders have 60 days from the day their airline stops flying to book with another carrier.

The law provides limited assurance for consumers, Stempler said, since available space on other flights often is scarce.

"It provides some help for passengers, but it's not the saving grace for them," he said.

Some travelers choose to spend more for refundable tickets, while others may hold off on booking if the airline's future looks uncertain. The risk with the latter tactic is ending up without a seat.

"It depends on what's available in your market and the particular airline and how precarious the situation is. Sometimes you have to choose the best of some poor choices," he said.


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