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Airlines Face Tough Choices

April 19, 2008 By: George Dooley

American Airlines, Continental Airlines and Southwest all reported losses for the first quarter of 2008. American said its recent flight cancellations earlier month will cost the airline in the “high tens of millions,” and as a result, American will reduce capacity and sustain its current hiring freeze. Continental said it would cut capacity and cited a 50 percent increase in fuel costs. Southwest, too, said it would scale back plans for growth.

Weak financial performance underlined the airline industry’s other problems: Four carriers filed for bankruptcy in the quarter and flight cancellations—primarily but not exclusively by American—angered hundreds of thousands of travelers.

The rash of flight cancellations also called into question Federal Aviation Administration policies and leadership as well as the quality of Congressional oversight. Complex issues of air traffic control, airport and air space capacity again became headline news.

Even the proposed merger of Delta Air Lines and Northwest Airlines was greeted with skepticism. Consumers and travel agents questioned if the merger would result in cost and service benefits or compound existing problems. The move will be subject to intense scrutiny by Congress and the Departments of Transportation and Justice.

The proposed merger also set off a chain reaction among other airlines in the U.S. and internationally, who scrambled to evaluate the impact of a Delta/Northwest merger. Speculation that a link between United and Continental was possible was widespread, while a link between United and US Airways was another possibility mentioned.

“This merger will change the competitive landscape for Continental and the entire airline industry,” Continental’s Larry Kellner, chairman and CEO, said in a statement saying that Continental would review its strategic options. Continental has an alliance with Northwest, Delta and Sky Team.

Richard Anderson and Doug Steeland, the CEO’s of Delta and Northwest respectively, argue that the merger will benefit employees, communities and consumers. They said that collectively the airline industry has lost $29 billion since 2001. “Consolidation in the industry may be the only alternative to another wholesale round of turmoil and dislocation,” they wrote in a recent Wall Street Journal article.
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