United makes cutbacks to cover fuel

April 22, 2008 7:43:59 PM PDT
United Airlines says it will have to trim its payroll and scale back its flights, because of skyrocketing fuel prices and a weak economy. In the past 3 months alone, United has spent $1.58 billion on fuel, a third more than a year ago, and it's not getting any cheaper.

The airlines hit turbulence every time there's a dip in the economy, but this time, they're being hit by a two-fisted punch. Jet fuel is very much a villain. Airline employees and their passengers are going to feel the pain.

United is the largest carrier at SFO, carrying about half of all passengers and soaring jet fuel costs have hit hard.

Costs soared $618 million in the first three months of the year. That's a 50 percent increase over a year ago, leading to a $542 million loss for the quarter.

"United got caught with their pants down. There's no way around it," said Henry Harteveldt, a San Francisco based airline analyst for Forrester Research. He was in Dallas Tuesday evening.

"They built their entire business plan coming out of bankruptcy on $50 a barrel oil. It hasn't been that in forever," says Harteveldt.

United says it's taking swift and potentially painful steps to cover the surge in fuel expenses. The airline will reduce capacity by nine percent by year's end. That means fewer empty seats by reducing flights. It will retire 30 older aircraft, which are not fuel efficient.

They will also trim expenses by $400 million and lay off 1,100 employees. 500 of those employees are non-union and 600 are union. That's about two percent of the airline's workforce. The teamsters represent 5,000 maintenance workers at United's SFO facility.

"I've been laid off twice myself in my career at United Airlines, and thousands of people across the airline industry take that same hit when the airline does take a dip with the economy," said Richard Petrovsky, a Teamsters business agent.

Soaring oil prices are hitting all the airlines. Jet Blue's fuel costs are up 62 percent, Continental's costs are up 53 percent, and American is up 45 percent.

United is trying to stabilize volatile fuel costs by hedging and negotiating long-term contracts. However, not all airlines can do that.

"It's a little like applying for a loan, for a mortgage or something like that. You have to have a good credit ratings, you have to have deep pockets to show that you can back that purchase up, and so if airlines have cash flow problems or maybe in bankruptcy, they can't do that, so it's very challenging for some carriers and easier for others," said Mike McCarron, the San Francisco International Airport spokesman.

The pain of fuel costs will be shared with consumers, too.

"They recently hiked the change fee for tickets. They now charge $150 rather than $100," said Harteveldt.

United has also re-instituted the Saturday night stay over requirement on some fares. That will raise prices primarily for business travelers. Wall Street is bracing itself for more bad news from the airlines. Delta's earnings come out on Wednesday, Alaska on Thursday, and US Airways on Friday.


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