Airlines Struggle For Answers Amid Rising Costs, Low Fares

Prompted by the surge in Jet-A prices following Katrina, the major domestic air carriers have asked the Department of Transportation for some temporary relief: an exemption from the 7.5 percent excise tax imposed on each leg of a flight on a domestic airline. Customers wouldn't see any ticket savings in such a move, but it would give room for the carriers to then add a surcharge to cover their increased fuel costs.

The response from the DOT? Ah, no.

According to Reuters, Transportation Secretary Norman Mineta has all but closed the door on the proposal, saying that the current tax law does not allow such a move. Any exemptions would also need congressional approval, something that has yet to be sought by the administration.

To soften the blow somewhat, Mineta is considering a rollback of the tax paid by the airlines on fuel, equal to 4.4 cents-per-gallon. The move already has the support of several US senators with ties to aviation.

However, such a measure might only be a stopgap solution, doing little to ease the financial burdens on domestic carriers. Even before Hurricane Katrina wiped out nearly 13 percent of all jet fuel production in the Gulf Coast region, industry analysts were expecting losses of over $7 billion this year alone.

Prices for Jet-A jumped nearly 50 cents a gallon in the past two weeks. Considering those prices were already at all time highs before the hurricane, it's hardly shocking that industry fuel costs could top $30 billion this year, according to the Air Transport Association.

Most carriers were struggling for profitability long before today's high fuel prices and the still-unforeseen full impact of Hurricane Katrina. United Airlines has been scrambling to emerge from bankruptcy since 2002, US Airways is currently restructuring under Chapter 11, and two more major carriers (Delta and Northwest) are teetering on the brink of it.

On Wednesday, Northwest Airlines announced suspension of their daily JFK-Tokyo(Narita) run as of October 2, citing high fuel prices. "Unfortunately, the record-high cost of fuel, a challenge facing the entire airline industry, is severely affecting the financial viability of some routes and forcing us to make some difficult decisions," said Northwest VP Phil Haan.

It's also no secret that the costs of doing business for airlines has risen far faster, especially of late, than passenger willingness to shoulder some of that burden in the form of higher ticket costs.

Even with fees added for post 9/11 security (we'll debate the dubious returns on that particular investment later) and ever-present taxes (ditto) that can make up almost 1/4 the cost of a ticket, larger carriers like United are nearly always locked in some form of fare war with low-cost carriers such as JetBlue and Southwest, maintaining artificially low ticket prices in order to retain their market market share.

While that is certainly to the passenger's benefit in the short term, there's also the fact that any rewards would be moot if competing airlines were to then go under completely.

After all, there's only so much money to be made from cramming as many seats as allowed by the Geneva convention onboard a 737 -- and then three more -- just as the removal of free "meals" and pillows onboard domestic flights can only net so much in savings.

FMI: www.airlines.org/