How to Make Airlines Profitable Again

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U.S. airlines are getting it wrong, even as they're trying to get it right.

Good news first: Come September, nonstop flights between New York and 25 U.S. and foreign destinations will be eliminated. Overall domestic capacity is expected to shrink by 13%, a move designed to help AMR's (NYSE: AMR) American, Continental (NYSE: CAL), Delta (NYSE: DAL), UAL's (Nasdaq: UAUA) United and other carriers stave off high fuel prices.

The cutback makes sense: Load factors are high -- 79%, on average -- but only because some destinations draw packed aircraft while others don't. Airlines are cutting capacity on routes where breakeven or better loads are harder to find.

That's good news for airline investors. For passengers? Not so much. Lower capacity leads to higher loads, which means your next flight is likely to be at least 85% full -- on a good day. More often, you're likely to hear this:

Good afternoon, ladies and gentlemen. Our flight to [destination you really need to get to right now] is overbooked, and we're asking for volunteers. If your schedule can accommodate a later flight, please come see us at the podium, and we'll give you a coupon for [something you really don't want].

Sounds just (cue Bill Lumbergh voice) great, doesn't it? Sure, but it gets worse. Specious, almost random, fees are too often replacing fare increases. Surfboards are a good example. Surfers can expect to pay as much as $300 to bring their boards with them, the Los Angeles Times reports.

That's worse than lame, it's stupid. A golf bag costs a few bucks, but a surfboard commands $300? Who's responsible for these rules? Congress?

Here's the simple truth of the airline industry: Every carrier -- and I mean every carrier -- needs to raise fares. Sure, there's a danger in that. The economy stinks right now, and higher prices would drive some customers away.

But not the fat-wallet business travelers. And we've yet to see airlines monetize open seats or services as well as they might. Boeing's (NYSE: BA) new 787 Dreamliner and similar fleet upgrades should provide more opportunities to appeal to these less-than-frugal fliers. Grow a spine and take them.

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