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Can Airlines Still Turn a Profit?

MELISSA BLOCK, host:

One of the reasons Delta and Northwest want to merge is the cost of jet fuel. Soaring prizes are eating away at airlines' profits.

Darryl Jenkins is an airline industry consultant. He says while oil hovers around $110 a barrel, jet fuel costs about $130 a barrel.

Mr. DARRYL JENKINS (Airline Industry Consultant): In the last year alone, it's gone up 60 percent. It's a big jump. Five years ago, it was 15 percent of your operational cost. Today, it's well over 50 percent of your operational cost.

BLOCK: And when airlines made projection for their budgets, would they have anticipated anything like that 60 percent increase?

Mr. JENKINS: No. Take Delta Airlines for example, when they came out of bankruptcy, they thought they were being conservative and based their rough structure on jet fuel at $90 a barrel. So when it went up, a lot of routes that they were flying, which were previously profitable, are no longer profitable.

BLOCK: How much of that cost ends up getting passed on to passengers?

Mr. JENKINS: Fares are up probably 7 percent this year, and in addition we're adding fees for things like baggage which are very weight-related. If you take all the bags on the plane, and it's the same as adding another 40 or 50 peoples' weight to that plane and it takes all that additional jet fuel, so I think we'll see more charges like that in the future.

BLOCK: And when you say we, who is we?

Mr. JENKINS: Oh, the airlines in general.

BLOCK: Well, with these clients of yours, the airlines, when they're figuring out how to stay afloat assuming that fuel does stay as high as is it now -maybe it goes higher, what are your options?

Mr. JENKINS: Well, you don't have a lot of options. Sooner or later, you're going to have to raise fares, aren't you? You can change the type of plane going into an area, rather then flying a very large plane with very large cost, you fly smaller planes with lower total cost.

BLOCK: And does consolidation like this proposed merger with Delta and Northwest, does that help?

Mr. JENKINS: Currently in the world, we have global corporations, but we really don't have, in the United States, any global airlines. And so you had Delta Airlines which could fly you off to Europe and Latin America, but you could fly almost nowhere to the Pacific Rim. And then you have Northwest Airlines, which has a good domestic route structure, and they could fly you to Tokyo and beyond. And so, you pretty much have a marriage made in airline heaven where now you have an airline that can fly you pretty much to all the major destinations in the world.

So Delta Airlines, when this merger is completed, will be able to compete for contracts with large global corporations. And in these contracts, people are flying longer miles in the front of the plane, and the revenue that comes from those contracts will allow them to pay for jet fuel.

BLOCK: Uh-huh. So that's how they would boost their profits then.

Mr. JENKINS: That's correct. The purpose behind the mergers, and the reason we will see more, is that it allows large airlines to fly more places in the world. It increases your product offering and allows you to sell higher-prized products. And the higher price products are the ones that are going to bring in the revenue which allows you then to pay for your increased jet fuel.

BLOCK: What about smaller carriers? What could they do?

Mr. JENKINS: Well, I think you're going to see some real interesting things happen with carriers like JetBlue and Southwest and AirTran which have been very well managed for long periods of time now.

As the airlines began to consolidate and you have these big mergers, at a certain point (unintelligible) department - with some of these mergers, will require them to cut back their holdings at certain airports where they might be currently dominant. And that will open up opportunities where there are currently a large number of very high fares in markets, so it will allow them to enter those markets, grab those high fares which they've never been able to get before. And I think that's what they're looking at long term for their survival as well.

So the low-cost airlines, which oppose the United-U.S. Airways merger in 2000 -a merger I worked with United on - are all lining up, hoping for industry consolidation because they see themselves as very, very big benefactors from airline industry consolidation.

BLOCK: Darryl Jenkins, thanks so much for talking with us.

Mr. JENKINS: My pleasure.

BLOCK: Darryl Jenkins is a consultant to the airline industry. Transcript provided by NPR, Copyright NPR.

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