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Benjamin Spillman

Airline crisis: Feels like the sky is falling

11 April 2008

LAS VEGAS, Nevada -- Sky-high jet fuel costs and a recession won't necessarily make flying to Las Vegas a bigger pain.

It could be more like a dull ache that gets progressively worse.

Las Vegas passengers will still have relatively low fares, myriad flight times and airlines to choose from, and a better selection of direct flights than similar, or even larger, communities.

But the fiscal squeeze that's already grounded four carriers in recent weeks will likely force remaining airlines to wring low-performing flights and cheap fares from their offerings.

That means seats will get a bit more expensive, flights will be a little more crowded and passengers and crew may be slightly crankier, unless the economics of the airline business somehow change for the better.

"It is going to make people irritable," said Corene Nelson of Las Vegas as she waited for a Frontier Airlines flight to Denver on Thursday.

The cost of jet fuel rose nearly 6 percent during the past month and nearly 62 percent in the past year.

That, combined with an economic downturn that's making Americans feel poorer, is putting pressure on carriers stuck between a need to cover higher costs and a desire to encourage folks to keep flying.

Last week the pressures were evident in the demise of Aloha and ATA airlines, two carriers that represented as much as 40 percent of the service between Las Vegas and Hawaii, Sin City's 10th largest source state for visitors. Discount airlines MAXjet and Skybus, and charter carrier Champion are also broke.

In recent months US Airways, the second-largest carrier at McCarran, has posted revenue declines greater than 20 percent. The airline, which posted lower revenue in the fourth quarter of 2007, has cut back low-fare, late-night Las Vegas routes to shift aircraft to more profitable trips.

"It is hard to find routes in the U.S. that are making money," said Darryl Jenkins, former director of the George Washington University Aviation Institute.

There's been speculation that Frontier, a popular choice between Las Vegas and Colorado, could succumb to financial pressure. The airline gets high marks from customers and has been growing, but its competitors include much larger carriers Southwest and United Airlines.

"It is between the Rockies and a hard place," said George Hamlin, managing director for the aviation consulting firm ACA Associates. "There clearly is not room for three full-scale competitive carriers in Denver."

A Frontier spokesman did not return calls for comment.

Southwest, the carrier with the biggest presence in Las Vegas, is holding steady despite the industry turmoil.

Bill Owen, Southwest's senior schedule planner, said the airline had 245 daily departures from McCarran in March and April, up from 230 those months last year.

"Our traffic to and from Vegas is incredibly strong," Owen said.

The airline maintains low fares and profits in large part by hedging fuel, buying some of its fuel in bulk in advance to keep costs down when oil prices rise.

But even with hedged fuel, Southwest on Thursday announced fare increases of $2 to $6 as a result of high oil prices.

"Compared to what other carriers have done, it is negligible," Owen said.

Overall, the number of flights daily from McCarran increased nearly 3 percent in January and 2 percent in February. But the number of passengers daily was down almost 3 percent in January and flat in February, suggesting planes left with more empty seats which would give airlines incentive to reduce service.

In March, the number of flights leaving McCarran was down 1 percent compared with 2007. March passenger figures are not yet available.

It's tough for routes to and from Las Vegas to make money because many passengers use frequent flier miles earned on expensive business flights to get cheap or free travel for a gambling vacation.

"We always called Las Vegas 'Death Valley' ... because the fares suck," Jenkins said.

Nelson, an operations manager for a health care company, travels two weeks every month and said she's seen airline service fray around the edges.

She said she witnessed pressures on the industry in action a few weeks ago at the Southwest gates in Salt Lake City. At the time, Southwest was grounding jets the airline had neglected to properly inspect, an issue that's now grounding flights by American, Midwest and others.

People from the grounded flights were crammed onto others or stuck milling about the crowded terminal.

"It was packed, people were irritated, agitated," Nelson said.

In Las Vegas, ramifications of economic turbulence for airlines could reverberate beyond the airport to the Strip if hotels lower rates to entice tourists and conventioneers to keep coming despite longer lines and thinner wallets.

Senior investment analyst Joel Simkins, who specializes in casino and leisure company stocks for Macquarie Capital, wants to know how big resorts might react to the problems of the airline industry, which is responsible for delivering about half of the 39 million people who visit Las Vegas annually.

Simkins said the fixed cost of maintaining a fancy hotel room on the Strip for a night can be as low as $20 to $25. If the room fetches $150, $250 or even $300 per night for the hotel, it adds up to a nifty profit, the kind of money that in recent years had Wall Street bidding some casino stocks beyond $100 per share.

"That is a pretty good margin on a business," Simkins said. "Every incremental dollar is extremely profitable."

Investors worry tough times for the airline industry will slow the flow of easy money from Las Vegas resorts from a gush to a trickle.

In a note to investors Thursday, Simkins said long-haul fares from Boston, New York, Miami and Washington, D.C., to Las Vegas are up 15 percent to 30 percent in the last year.

"Our concern is that it is going to cause (resorts) to discount room rates," Simkins said. "Driving higher room rates has been a very significant profit center for the Strip."

Passengers Barbara and Charles Weatherholt and Judy Knowles of O'Fallon, Ill., provided a prime example of how bargain-hunting travelers gravitate to Las Vegas.

They flew Frontier from St. Louis to Denver to Las Vegas on tickets they got for spending $150 on Dockers brand clothes. The group got a discount stay at the Rio and sought out half-price show tickets during a four-day stay that ended Thursday.

Knowles says she trolls the Internet for travel bargains and alerts friends and family to the deals.

"When I see a really great deal I call and say, 'See what I found,'" she said.