Despite Low Oil Prices, Airlines Foresee Tough Year

Airlines suffering under the burden of high oil prices earlier this year have been given a reprieve. Last summer, oil was selling for about $140 a barrel. Since then, the price has dropped below $40 a barrel. But just as the airline industry starts posting some profits, a poor economy is threatening to hurt business.

"We thought, up until about two weeks ago, it was going to be a pretty good year," says airline industry analyst Mike Boyd. "But now, demand is dropping like a piano off the 20th floor."

Boyd predicts airlines will have 15 percent fewer passengers in 2009. Add to that the fact that many airlines aren't getting the full benefit of lower fuel prices.

"Most of us hedged at some point as oil was coming down, because we all were concerned it would run right back up again," said Steve Snyder, spokesman for Denver-based Frontier Airlines.

Betting the wrong way on fuel-hedging contracts cost Frontier $2.4 million in November, but that was minor compared to some of the big airlines. Southwest, United and Delta are among those that had to set aside hundreds of millions of dollars for collateral to guarantee their hedges.

Even with those costs, however, the lower fuel prices have been great news for airlines. Frontier, for example, posted a $2.9 million net profit in November. That's not bad for a company that was forced into bankruptcy last spring. Most predict the small airline will emerge fairly strong from bankruptcy sometime in 2009, with its new fees for checked baggage fully intact.

Across the industry, airlines said they needed checked-baggage fees to offset high fuel costs. If airlines were hoping customers wouldn't notice that the underlying reason for those fees has gone away, they have.

"I don't think it's fair the airlines should be continuing on with the extra charges that they've been imposing on people," said Lupe Felix of Colorado Springs, Colo.

Given the industry's history of offering meals and extra services even to those holding the cheapest tickets, Alan Robins of Philadelphia says being nickel-and-dimed is tough to get used to.

"For example, we flew U.S. Air, and they charge a dollar for a cup of coffee," Robins said. "Now a dollar for a cup of coffee is reasonable, but the concept of being charged is not."

Flyers shouldn't expect any relief from extra fees anytime soon. Airlines are focused on survival and preparing for a lean 2009. They are hoarding cash while they still can, hoping that will get them through until the economy improves.

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