The auto sector comes close, especially companies like GM, Ford, and Chrysler that depend heavily on truck sales. But at least auto companies can change their mix of vehicles to adapt to high gas prices. They may not be able to sidestep all the pain of high gas prices, but at least they have options.

So what options do the airlines have? They’ve already cut costs to the bone. And from the feedback I’ve received, it seems like they’ve royally pissed off passengers and employees alike.

IDE reader, Wayne said I shouldn’t be pointing the finger at unions or the costs of legacy benefits: “…most U.S. legacy carrier employees have had their incomes slashed by at least 40% and have either watched as their pensions were frozen or dissolved.  Along with the pay cuts, premiums on health care doubled, work rules returned to the dark ages, and even crew meals were eliminated.”

Sadly, Wayne is right. Employees have taken it on the chin.

But other readers say it’s the passengers who are taking it on the chin. Jean-Antoine, for one, resents how passengers are being treated. He says, “whilst we are being asked to pay (and it’s only normal) for our transportation costs, we are treated like rotten meat. Some one or two decades ago the airlines were going out of their way to make you feel happy to board an airplane. Nowadays you are being engulfed in huge airports where nobody can give you proper directions… where the personnel is overworked, most of the time disagreeable and often not concerned…”

Harsh words from Jean-Antoine but he wasn’t the only one who took this view. Can anybody disagree that there’s been a sharp deterioration of services? It’s pretty clear that customers don’t get the attention, food, and friendly service they used to get.

Just yesterday, United announced it’s going to ground 94 (64 in addition to the 30 previously stated) 737 jets, plus some of its bigger 747’s. What’s more, they’re expected to announce more employee reductions on top of the 500 they’ve already said they would cut.

Airlines have disaffected their two most important constituencies: employees and customers, and what do they have to show for it? Not much. Their collective backs are still up against the wall…

The question is: can they do anything now to avoid downsizing?

Hubs are expensive to maintain. Can they simply drop some of their money-losing hubs? Can they go further and adopt the low-cost carrier model?

The big problem with this line of thinking is that high fuel prices are sabotaging the profits of the low-cost carries too.

Whether legacy or low-cost, you can’t fill half or three quarters of a plane with people at 1988 prices, have it run on jet fuel that costs $161 a barrel, and make money.

The reality is that lots of low-cost airlines have also struggled. In the past six months, at least a dozen airlines have failed as oil rose. American companies ATA, Frontier, Skybus and Aloha Airlines have all filed for chapter 11 bankruptcy protection this year.

In all, about two dozen low-cost carriers and other non-legacy carriers have filed for bankruptcy or gone out of business since 2000.

But listen, retailers, restaurants, high tech and industrial manufacturers fail all the time. The airline industry has simply proved not to be the exception. And higher fuel prices are sure to increase the rate of failure (or bankruptcy) in this sector.

As Stephen Ridgeway, the chief executive of Virgin Atlantic Airways, recently said, “The good times are over.”

Let the downsizing begin. Only then can supply and demand rebalance and ticket prices start to rise. There’s no other cure.

Good Trading,
Andrew Gordon

P.S.  To let me know what you thought of today’s article, send an e-mail to: feedback@investorsdailyedge.com.

Source: Airing It Out

He says…

You just wanted to increase response, didn’t you? I get so tired of hearing U.S. gas prices compared to Europe. So what if Europe pays more? Everyone knows in a free market companies which purchase in larger quantities pay less (look at Wal-Mart). Our “company”, the USA, buys fuel in larger quantities. We DESERVE lower prices, because we use more than Europe does. In fact, it’s not even close. Virgil S

Virgil you somehow missed the point that one of the biggest reasons why Europe’s gas is more expensive has everything to do with the taxes they put on fuel. For example in France, taxes make up as much as 70% of the pump price!

In the end, they pay slightly more than we do for gas before taxes. Does this make sense? Only slightly. Yes, we consume more gas. But our gas travels much further. So transportation costs should be more than in Europe. Instead, we are ‘rewarded’ with cheaper fuel prices. Just thank Uncle Sam for not taxing the heck out of us.

After Virgil’s e-mails, I got a few others. Here’s another one of my favorites, based on how silly it was.

He said…

Charles, it’s easy to criticize McCain – wish you would also do that to the democratic candidates. How many lies have they brought to the forefront in the last couple of months? Anything to say about that? Who could/would trust either Clinton – with her record in the Whitehouse – or Obama – with his ’experience? Just to vote for ‘change’ is the answer? – How much of a brain does that take? I can see on which side of the fence you are sitting!
Keep it up Charles; I don’t like what I read. Think you should know why people unsubscribe to your letter. Renate R

Renate, I wish you would have read my previous articles Clintonomics 101 and Obamanomics 101. Had you read these two e-articles you would see that I don’t just pick on one presidential candidate. I pick on all of them.

Let’s face it: they all have some very bad ideas regarding what they think will fix the economy. Both Democrats want bigger government and more spending. They also want to bail out the ‘ownership’ economy we just went through.

And the Republicans just want to cut taxes. But ask them to back that up with a spending cut and you’d be asking too much.

That’s the same point Mike L. wanted to make when he said…

Charles’ assumption that McCain (or any Republican) will remain tough on taxes and spending is dubious, particularly after the last 8 years. I can remember “Read my lips – NO NEW TAXES.” (Bush Sr) and even “no nation-building” (Bush Jr campaigning for his first term — just what the heck are we doing with Iraq then?!).

Mike – I was never under the assumption that McCain would control spending. I know better than to ever think such fantasy!

But not everyone went on the defensive. Alan C. definitely wrote in with…

“Your assessment of Sen. McCain’s gasoline tax holiday scheme was spot-on”

Owen K. also agreed, writing in…

“Charlie is right in that the big savings are going to go to buy food or pay bills. Wake up all you politicians!!! You had damn well better start facing reality, if you are capable (which I doubt).”

But out of all the people who wrote in agreeing, Alan G. had the funniest response:

I agree with Charles assessment of McCain’s idea to create a holiday for the gas tax. Instead of suspending it for three months, let’s at least double it and use the proceeds to create a fund that would pay bounty hunters to shoot environmentalists! Maybe after we shoot enough of them we will be able to explore for and use our own natural resources instead of paying the Middle East for theirs!

Now Alan, while I don’t agree that we should shoot environmentalists (I think we need them very much) I definitely feel your passion. I happen to think we should use tax revenues to develop the infrastructure needed for hydrogen fuel or electric cars. But to each their own, right?

The end-result of this gas-tax holiday is that it’s a bad idea. I say it’s a bad idea because it doesn’t do anything to fix the problem causing higher gas prices. I also think it’s a bad idea because it takes money away from our roads.

But I didn’t know the seriousness of the road situation. Chris S. wrote in with a piece that showed that in 2008 up to 37% of the money devoted to the U.S. highway trust is being diverted!

So what would the solution be? Raising gas taxes by up to 213%!

I’m not even going to talk about that idea, because it would take another article (at least).
Instead, I’m going to end this by saying that I absolutely love getting feedback from you.

Reading your e-mails allows me to get to know you better and write future articles that really address what’s concerning you. Often times I’ll see different takes on any given situation. And other times I’ll get a real good tid-bit of information like the one I got from Chris S.

In the end, I always want to keep this line of communication wide open. So if you ever have a question to ask or something you want to show me, feel free to write in at feedback@investorsdailyedge.com

I’ll always make an attempt to respond to your feedback.

To your success,

Charles