New Routes To Profit?

By SALLY B. DONNELLY

Politicians in Washington may be looking for a way to back out of trouble spots like the Middle East, but U.S. airlines are increasingly looking for a way in. A viciously competitive domestic market is sending some major airlines abroad to find healthier profit margins on international routes--anywhere but in the U.S., where low-cost carriers and high fuel prices are killing their bottom lines.

Last month United Airlines became the first U.S. carrier to offer nonstop service between Washington and Kuwait City. The airline says it's focusing on oil and gas companies that move employees back and forth. United predicts that a third of the plane will be full-fare business passengers, whose high-priced tickets will help subsidize the cheaper leisure fares. Kuwait is also a jumping-off point for U.S. military personnel and government workers going into war zones in Iraq and Afghanistan. And the route is sure to become a "war shuttle," filled with troops, Pentagon officials, contractors, journalists--even the occasional covert operative. The 11-hour flight saves travelers more than four hours and a connection. "It's an amazing time saver," says Jay Jones, a Virginia-based consultant who was on the inaugural flight. "Because of this route, I plan on making Kuwait my gateway to the region."

Delta, which is struggling to emerge from bankruptcy and is being pursued by US Airways, is expanding overseas too. It has announced 50 new international routes in the past year, including New York City to Accra, Ghana, and in May 2007 it will become the only U.S. carrier with a nonstop flight to the United Arab Emirates, offering an Atlanta-to-Dubai route. Dubai is a rapidly growing global business hub and playground, and it's home to expanding U.S. government and military press operations that cater to Arab media--all but ensuring that Delta can fill seats to the emirate.

While not all these routes may prove profitable, any little bit of extra income would help the beleaguered industry. The major carriers have lost about $35 billion since 9/11, and the high price of jet fuel has left only a few airlines forecasting profits for this year. Security scares (or worse) still loom large; just last August an airline bomb plot was foiled in London--a reminder of how fragile confidence in air travel remains.

Nonetheless, airlines have cut back on the number of planes in operation, ensuring that many flights are nearly full (and that you may be squished in a middle seat). Carriers have eliminated all sorts of amenities--from snacks to pillows and blankets--and analysts expect the financial recovery to continue into next year. Standard & Poor's estimates that the top 10 U.S. carriers will earn $4 billion in 2007. And the expanded international routes should bolster profits going forward. "New flights are often leading-edge indicators that can stimulate underserved routes," says an airline executive. "And with the exception of the competitive North Atlantic, these can be very lucrative flights."

The majors won't have these routes to themselves and may soon face competition for business they once had locked up. Low-cost airlines such as AirTran, JetBlue and Spirit are bidding for part of the $2 billion the Department of Defense spends annually to move personnel and equipment around the world. Traditionally, major passenger and cargo airlines have dominated that business, but they may soon find themselves in a bidding war with the lower-cost carriers.

And the biggest fight over international travel is yet to come. American, Continental, Northwest and United are vying for U.S. government approval to launch new daily service to China next spring. A round-trip full-fare ticket from New York City to Beijing runs about $11,000, making it one of the most profitable routes on the planet. Additional competition may lower the price a bit--just not too much, the airlines hope.