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US airlines pull out of a tailspin
By Justin Baer in New York
Published: November 2 2008 19:05 | Last updated: November 2 2008 19:05
A surge in fuel prices had overwhelmed airlines, draining profits and sending them scrambling to slash costs, tack on new fees and raise money from skeptical lenders.
The deathwatch had begun, even for legacy carriers such as American Airlines and United Airlines.
Then, as summer ended and Wall Street imploded, the menace was gone. Crude oil, which peaked at $147 in July, now trades below $70. The commodity’s rapid descent, coupled with the steps carriers took to reduce expenses, has turned the industry’s outlook for 2009 much brighter than many investors thought possible four months ago.
However, it would not be the US airlines business, whose 30 years as a deregulated industry has been marked by fierce competition and an occasional spate of bankruptcies, if there were not another potential storm looming.
The same dynamic that routed oil prices – fears that the credit crisis will send many of the world’s biggest economies into a recession – also threatens to envelope the airlines. The slowdown had sapped demand for air travel. Corporate and consumer confidence has plummeted. The industry’s executives have said they are prepared for the worst. They have been through downturns before. Besides, they say, the steps they took to trim capacity, retire old aircraft and find new sources of revenue leave them better prepared than ever before to face the prospects of fewer passengers.
“As a result, they have put themselves in a good position to come through the economic downturn without bankruptcies and then be able to take advantage of the recovery, most likely in the spring,” Ray Neidl, an analyst at Calyon, wrote as he raised his rating on seven large US airlines to “add.”
Even the worst economic slowdowns on record have cut revenue by no more than 1.2 per cent, Northwest Airlines said last month. For a large US carrier such as Northwest, that is about $150m in lost revenue a year. Compared with the savings those same airlines will realize from the drop in fuel – more than $1bn annually – the slowdown looks tame.
“We’ve got ourselves well-positioned to navigate through this,” Doug Parker, chief executive of US Airways, told the Financial Times. “The run-up in oil forced the industry to restructure around a much different world.”
Of course, no one knows how deep and far-reaching the effects this downturn will have on business and leisure travelers alike.
Michael E Levine, a former airlines executive who teaches at New York University’s School of Law, cautioned that carriers need to tread carefully even as they benefit from the rapid descent in fuel costs.
Mr Levine points out that it is paying passengers, and not cheap fuel or brand-new efficient aircraft, that shape an airline’s fate. And the costs of fuel, which only months ago pushed a number of small carriers out of business and threatened the solvency of large ones, may not stay down for long.
Longtime airlines observers also wonder how long carriers will remain disciplined in managing their flight schedules. The steep capacity cuts and ticket-price increases necessitated by rising fuel costs may prove fleeting.
Carriers must also contend with a much stronger competitor after the merger of Delta Air Lines and Northwest. The deal, has created the world’s largest airline, with services to more than 375 destinations in 66 countries.
Other airlines came close to striking deals until concerns that merger-related expenses would overwhelm balance sheets weakened by fuel, and may revisit those discussions now that the crisis has abated.
Meantime, carriers have continued to take steps to raise cash. Even with its biggest threat in remission, the industry cannot be too careful.