As gasoline prices remain high, the pressure on the airline industry continues to mount. Last week, Delta (NYSE: DAL) was reported to have hired the New York-based law firm Davis Polk & Wardwell for advice on restructuring its business. UAL (OTC BB: UALAQ.OB) also noted that fuel prices were the reason for the company's inability to turn an operating profit in April.
Low-cost carriers were also hit. Frontier Airlines (Nasdaq: FRNT) reported fourth-quarter earnings on May 28 and cited high fuel costs for greater losses than Wall Street was expecting.
But higher fuel costs may actually end up being beneficial to the low-cost carriers like Frontier, Southwest Airlines (NYSE: LUV), JetBlue Airways (Nasdaq: JBLU), and AirTran (NYSE: AAI). As I have previously written, in my opinion it's just a matter of time before the low-cost carriers' superior business model dominates the industry. High fuel costs may be a powerful catalyst to speed up that process.
At a Bear Stearns conference on May 12, Frontier showed data on operating margins for the December quarter for a number of airlines. Southwest, Frontier, JetBlue, and AirTran were all more than 7%. On the other hand, traditional airlines such as Delta, United, and AMR (NYSE: AMR) all had significantly negative operating margins.
In addition, attempts by traditional airlines to pass the higher cost of fuel on to consumers are failing to stick. The latest attempt to increase fares, led by Continental Airlines (NYSE: CAL) a couple of weeks ago, was rolled back last week. Delta and Continental both commented that they were forced to roll back fare increases to "stay competitive." Last week's inability to increase fares was the third time in the last six months that a fare increase was attempted but quickly rescinded.
While higher fuel prices may be putting pressure on all airlines, on a relative basis, it is the weaker, traditional airlines with uncompetitive cost structures that are feeling more pain. In the long run, higher fuel costs may prove to be a great boost to overall industry profitability by accelerating the demise of the traditional airlines that have been able to hang on for longer than many had expected. Sustained higher fuel costs may force the much-needed industry shakeout to finally occur.
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Fool contributor Salim Haji lives in Denver, Colo., and does not own shares in any of the companies mentioned.
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