FT/Lex: US airline blues

LEX
US airline blues

Financial Times
Published: March 24 2008 02:00

There you are, flying in cattle class, your vegetarian meal having gone awol
and a baby wailing incessantly. But, short of baling out without a
parachute, what can you do?

Airline investors know the feeling, particularly those that bought into
plummeting stock prices during 2007. Many banked on at least one of three
things happening: the US economy holding up, jet fuel prices falling or,
failing those, industry restructuring. Right now, a recession looms,
kerosene has risen even faster than crude oil, and a tie-up between Delta
Air Lines and Northwest Airlines has been stymied by pilots.

In spite of the sector's drop, there is room for further falls. So far,
resilient demand has allowed airlines to raise ticket prices to help offset
higher fuel costs. Creative ways of boosting revenue have come to the fore,
such as JetBlue's latest wheeze, offering a few extra inches of leg-room for
a few dollars more.

But oil is the burning issue. JPMorgan calculates that this year's industry
fuel bill will be $25bn higher than in 2002, more than triple the savings
wrenched from labour in the last round of bankruptcies. If demand cracks -
and data for February give some cause for concern - the airline industry
will start burning cash at an alarming rate.

Some legacy carriers, most notably Delta, are already scaling back
investment and domestic capacity. Shrinking your way to profitability is
hard in such a high fixed-cost business, particularly if you weaken your
position at important airport hubs. But, short of rationalisation through
mergers, cutting the least profitable routes and redeploying aircraft to
more robust international routes (at least for now) makes sense for legacy
carriers. It will not be enough. But, so far, pilots stung by the cuts made
in the last downturn are loath to make concessions to airline executives
warning of dire conditions ahead. Shareholders will remain stuck in the
middle seat for a while yet.

http://www.ft.com/cms/s/1/df6adc64-f...077b07658.html