Airlines Battle Back to Profit, a Fare and a Fee at a Time

After a decade of losing money because of cutthroat competition, slumping traveler demand and volatile fuel prices, the industry has found a way to regain control of its fortunes — and make money — and that is by shelving its 1990s strategy of aggressive growth. Despite the weak economy, most domestic airlines will have their second consecutive profitable year in 2011, after losing $55 billion since 2001.

The one notable exception is American Airlines, which is set to report another quarterly loss on Wednesday. Once the largest airline, American has lost its top perch and is struggling with high costs and debt, and acrimonious labor relations.

American has become a distant third after being left out of the major mergers that have consolidated the industry, starting with the purchase of Northwest by Delta Air Lines in 2008 and followed last year by the merger of United Airlines and Continental and the purchase of AirTran Airlines by Southwest Airlines. The mergers allowed the biggest airlines to cut service to many smaller markets, ground unprofitable flights and focus on their most profitable hubs. With fewer airlines competing to make their seats the cheapest, carriers were able to increase fares. The nation’s top five airlines, including joint figures for United-Continental and Southwest-AirTran, accounted for 85 percent of all domestic seats in 2010; that compared with a 64 percent share for the top five in 2000, said Hunter Keay, an aviation analyst at Wolfe Trahan Company.

“This has been an incredible picture over the past three years,” Mr. Keay said. “It’s not rocket science. Airlines finally understand basic economics. It’s supply and demand. It’s fear-based discipline.”

Just looking at the number of seats available, domestic airlines’ capacity peaked in 2005 and has generally been falling since. But the cuts have been even steeper when the number of seats is compared with the size of the economy, said John Heimlich, the chief economist for the Air Transport Association, the industry’s main trade group. That ratio is at its lowest since 1979. “The industry’s survival over the past decade has necessitated a substantial degree of shrinkage,” Mr. Heimlich said. “It’s a combination of how oversupplied and under-demanded we’ve been and how tough the decade has been. That’s an unfortunate result. Most businesses would rather see an entity grow profitably rather than shrink profitability.”

With fewer scheduled flights, planes are now fuller than they have ever been. The percentage of filled seats on each flight has risen to a record high of 82.2 percent in 2010, compared with 71.3 percent in 2000, according to figures compiled by the Bureau of Transportation Statistics. And that number does not fully capture how full most flights are to the most popular destinations at the most desirable times.

Meanwhile, the flight experience has worsened, as the big airlines cut back their service and stopped providing free meals or even blankets and pillows on their flights. Legroom shrank on many of the low-cost airlines. Spirit Airlines, for instance, is now flying Airbus A320s with a seat pitch — or the distance between seats — of 28 inches. (A typical pitch at the other airlines is 31 inches.) That allows it to pack 178 passengers on these planes, 28 more than JetBlue, which flies similar planes, according to Matt Daimler, the founder of SeatGuru.com.

Domestic fares, which have risen in recent years, last year averaged $337. Adjusted for inflation, they are still nearly 30 percent lower today than they were in the mid 1990s, but the fare is only part of the price passengers now pay.

The airlines are now generating extra revenue from passengers by charging for everything from checked bags to priority seating to onboard items like food, television and blankets.

The fees can be confusing, with little consistency across airlines. American, Delta and Continental, for instance, all charge $25 for the first checked bag, while AirTran charges $20 and Southwest and JetBlue charge nothing as yet.. Some airlines charge extra for exit row seats or to sit in the first few rows of coach. Some apply cancellation charges. Some provide satellite television free; others charge for it.

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