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Airlines Face Cutbacks As Fuel Prices Soar

Airlines are cutting jobs, mothballing planes and reducing flights as they battle record fuel costs that have pushed the industry to its worst crisis since 2001, and the result is likely to be higher fares and fewer choices for travelers.

Continental Airlines became the latest carrier to announce cutbacks, saying Thursday it will shed 3,000 jobs—more than 6 percent of its work force—and reduce capacity by 11 percent this fall.

The company said its two top executives will forgo pay the rest of this year.

AP

The Houston-based airline said recent fare hikes have not covered the cost of fuel, which has nearly doubled in the past year. Continental estimates it will spend $2.3 billion more on fuel this year than last -- a difference of $50,000 per employee. Fuel has surpassed labor as Continental's biggest expense.

In a memo to employees, Continental Chief Executive Lawrence Kellner and President Jeffrey Smisek said at current fuel prices Continental is losing money on "a large number of our flights." As fares rise, fewer people will fly, and "we will need fewer employees to operate the airline," they said.

The executives said they expect most of the 3,000 job cuts will be handled through voluntary buyouts to limit layoffs. They didn't rule out more job losses.

Kellner and Smisek said they will not take salaries or incentive pay the rest of the year. In a regulatory filing, the company said Kellner, who was paid a salary of $712,500 last year, would get $296,875 this year, and Smisek's salary would be cut to $240,000 from $363,300.

Kellner's total compensation last year was valued at nearly $6 million, according to an Associated Press analysis, although about one-third was in stock and option grants that are now worth far less than they were when granted in February 2007 because of the slump in the company's stock.

Many analysts consider Continental to be the healthiest of the six big network carriers, a group that excludes low-fare Southwest Airlines Co. But that did not make Continental immune from cuts—the airline still lost $80 million in the first quarter after earning a profit last year.

"If they did not do it they would be irresponsible," said Ray Neidl, an analyst with Calyon Securities.

"At current fuel prices, the old economics do not work. Ticket prices have to rise dramatically, and the only way that can be achieved is by sharply reducing capacity," he said. "The whole industry has to show this discipline or some big airline will have to go out of business."

Continental is the latest airline to make sharp cutbacks.

On Wednesday, UAL'S United Airlines , the nation's No. 2 carrier, announced it would cut up to 1,100 more jobs, ground 70 airplanes and drop its coach-only service, named Ted. Two weeks ago, AMR'S American Airlines, the nation's largest airline, said it would cut capacity 11 percent to 12 percent after the peak summer travel season and probably eliminate thousands of jobs, though it hasn't given an exact figure.

Delta Air Lines said in March it would cut U.S. capacity about 10 percent in the second half of 2008. Northwest Airlines Corp., which Delta is buying, has announced smaller reductions, and a Northwest spokeswoman said further moves were being reviewed.

Philip Baggaley, an analyst with Standard & Poor's, said capacity cuts would help, but "we still forecast heavy losses for most airlines this year."

Fewer flights will inevitably lead to higher prices, most in the industry believe.

The biggest U.S. airlines have already raised fares about a dozen times since December, with some of the sharpest increases reserved for nonstop flights that let travelers avoid changing planes at crowded hub airports.

Airlines typically cut fares in the fall to spur ticket sales when kids are back in school and family vacations are over. That's likely to remain true this fall, even with Continental, American and United offering far fewer flights, experts say.

"They'll always discount for the fall even if they have less seats," said Rick Seaney, chief executive of price-watching Web site FareCompare.com. "But you're going to see more targeted restrictions, like minimum stay-overs, to prevent business travelers from getting cheap fares."

Airlines that had eliminated restrictions such as Saturday night stay-overs on cheap fares, because business customers hated them, have been putting them back in.

Fewer flights are also likely to reduce the ability of travelers to find a convenient flight where they're going. And airlines may drop service completely to some smaller cities.

Continental said it will announce next week which flights and destinations it will reduce or eliminate.

The airline operates hubs in Houston, Newark, N.J., and Cleveland.

Fewer flights will mean fewer planes. Continental has already pulled six planes this year and mothball an additional 67 planes through 2009. By the end of June, its fleet will number 375.

Less than two months ago, Continental was in advanced talks to combine with United to create an airline even bigger than .. But Continental walked away from the deal in April as oil prices soared and the industry's outlook slumped, and analysts see no other mergers immediately on the horizon.

Airline stocks rose on Continental's announcement, even overcoming another rise in oil prices.

The Amex Airline Index rose 7 percent, and shares of Continental gained 63 cents, or 4.3 percent, at $15.13 in afternoon trading.

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