GAO report reveals legacies cost-cutting must continue

Legacy airlines in the U.S. have slashed their costs, but a report from the Government Accountability Office (GAO) shows they still have a long way to go to return to profitability -- especially given what has happened to fares and fuel prices -- and to match the costs of their low-cost, low-fare rivals.

The GAO report classified Alaska, American, Continental, Delta, Northwest, United and US Airways as the legacy carriers.

Legacy airlines, as a group, have been unsuccessful in reducing their costs to become more competitive with low-cost airlines, the GAO concluded, using expenses per available seat mile as its measurement of spending.

Unit-cost competitiveness is key to profitability for airlines because of declining yields, which is the amount of revenue airlines collect for every mile a passenger travels, the GAO added.

While legacy airlines have been able to reduce their overall costs since 2001, these were largely achieved through capacity reductions and without an improvement in their unit costs, the GAO report continued. Meanwhile, low-cost airlines have been able to maintain low unit costs, primarily by continuing to grow.

More productivity from labor and a higher utilization rate for aircraft also contribute to the low-cost carrier advantage, the GAO said. So do the massive pension obligations many legacy carriers face under their underfunded pension plans, which are supposed to have enough money in them to guarantee the company can afford the monthly payments when employees retire.

Fuel also is a major factor. As of June 7, the jet fuel price for 2005 was more than twice as high as in 2002.

But it is mainly the low-cost airlines that have fuel hedges -- essentially prepurchasing oil at a lower price.

Southwest leads the way with about 85% of its oil hedged at $26 a barrel for 2005, about half the current per-barrel rate.

Other leading hedgers include America West, AirTran, Frontier and JetBlue.

The biggest legacy exception is Alaska, which is 50% hedged at $30, according to Air Transport Association figures.

To contact the reporter who wrote this article, send e-mail to [email protected].

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