As fuel costs soar, airlines cut drag

Commercial airlines experienced some cost-related turbulence this past year as sky-high fuel prices shook the industry and profits took a nose dive. The industry is taking several steps to smooth its route:

* To reduce operating costs; it is flying at higher altitudes with more passengers on board, scheduling fewer nonstop routes, and using the engines less when taxiing around the airstrip.

* Craft that are not fuel-inefficient are being flown less, sometimes even grounded, while planes consuming less fuel are being used more.

Also, manufacturers are producing and developing a new generation of fuel-efficient planes, encouraged by increased interest from passenger airlines.

Jet fuel prices have climbed from 10.2 cents a gallon in 1968 to 57.8 cents a gallon in 1979 to 95 cents a gallon a month ago.

Surprisingly, says Wolfgang Demish, an airline analyst with Morgan Stanley in New York, the rise in fuel prices is a "godsend" for the airline industry. Because of the present period of limited growth, the airlines will have to throw out the "excess baggage" of inefficiency, he says.

Before fuel price increases, there wasn't the demand for the new, more efficient type of aircraft. Now, with future profits at stake, the industry is looking for a better plane. The builders have felt the new demand.

Boeing is developing two new planes, the 757 and 767, for delivery in 1983. Savings on fuel are projected up to 40 percent.

Not all airlines have ordered the new planes. "The lack of money has slowed their acceptance," Mr. Demish says.

At present, because of the depreciated cost of lower price of older planes, their total operating costs per seat-mile is 10 percent less than the cost of a new plane. Thus, he says, there is no great pressure to fly a new fleet. "Now if fuel goes to two bucks a gallon we are in a different ball game" -- which might not be too far away, judging by recent price rises.

Neil Effman, a Trans World vice-president, blames the hesitation to purchase new planes on a wait-and-see attitude within the industry. Not all aircraft manufacturers have their new airplanes off the drawing boards yet, he observes. The companies are scouting "to see what the choices are, rather than being premature," he maintains.

For instance, Continental Airlines, while receiving the newer 727 fuel-efficient 200s, a stretched version of the 727-100, is "evaluating new-technology aircraft" and holding off buying, a public relations representative, John Clayton, says.

Attempts are being made in Congress to shorten the depreciation write-off time on new planes. Mr. Effman says the aircraft industry is sharing in the lagging productivity of the whole economy.

"We have not allowed companies to buy new machinery which would increase productivity because they can't recover their capital costs," he says.

Despite the large investment expense, some airlines are making immediate efforts to modernize.

"Pan Am has placed orders for a dozen L-1011s," says James A. Arey, a corporate spokesman. "We have just begun to receive delivery." He says the L- 1011 500 is the most technically advanced air transport in the sky, designed to shave off 6 percent of the fuel costs of comparable airplanes.

A more rapid buildup of a new fleet in the airline industry depends on profits, and presently most don't see a profit appearing on the books until next year.

First-quarter losses for the industry were $300 million; second-quarter losses were $200 million; and because of an anticipated profitable third quarter , this year's losses are predicted to float around $100 million. The first months of the '80s have created a rough runway for the coming decade.

More airlines are selling their old planes, such as the 707 and the 727-100. CD-10s, because of a tragic accident last year which hurt their reputation, and because of fuel inefficiency, are being sold.

In an effort to obtain lower operating costs with their present fleet, the airlines will fly fewer planes carrying more passengers more often. "Planes have high capital costs," Mr. Effman says. "To offset that they need to be used more hours in a day. We are flying more L-1011 and 747 hours than we did two, three, or four years ago."

He predicts that the long jump of nonstop flights will disappear as more routes have intermittent landings. This will be done to fill a plane as much as possible, decreasing the cost per passenger-mile.

As the average cost of the industry increases, so will the price of tickets, Mr. Effman indicates.

What hurt the industry in recent months, says Elliot Fried of Shearson Loeb Rhodes Inc., was the inability to offset costs with price increases. Now, with the reduction in "regulation lag" -- the time between application and approval of fare increases -- the airlines are able to increase fares quicker. As a result, ticket prices jumped 40 percent on average in the first three months of this year. Moreover, the Civil Aeronautics Board recently gave the lines leeway to raise fares as much as 30 percent above a base level without specific government approval.

The price elasticity (the tendency for an increase in prices to lower demand) is "less than we ever imagined a few years ago," says Mr. effman. "Even with the increase in fares and a slowdown in the economy, air traffic is only down 2 percent in the industry."