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Finally, reason for hope in the airline industry

Eight airlines are flying in bankruptcy and jet fuel prices are still wrecking budgets after spiking to all-time highs this fall. 2005 marks a fifth straight year of multibillion-dollar losses.
As jets from United Airlines and Northwest Airlines taxi in the foreground, a United Shuttle takes off from Chicago's O'Hare International Airport earlier this year. Analysts are cautiously optimistic about the airline sector if fuel prices continue to ease in 2006.M. Spencer Green / AP file
/ Source: The Associated Press

Eight airlines are flying in bankruptcy and jet fuel prices are still wrecking budgets after spiking to all-time highs this fall. 2005 marks a fifth straight year of multibillion-dollar losses.

Yet there’s reason for cautious hope that the worst may be over in the volatile U.S. airline business. If oil prices continue their recent trend downward and no catastrophes occur, the industry could even return to a rarely visited destination in 2006: Profitability.

“We’re not saying things are hunky-dory,” said John Heimlich, chief economist for the Air Transport Association, the trade group representing U.S. airlines. “All we’re saying is that some of the indicators we look at and some of the recent trends are promising, and that’s the first time I’ve used that word in a long time.”

Walloped by more than $30 billion in losses since the 2001 terror attacks, airlines cut more labor costs, eliminated more unprofitable routes and reduced more capacity this year.

The restructuring has reshaped virtually every airline company, not just those operating under federal bankruptcy protection as 2005 wound down: United Airlines parent UAL Corp., Delta Air Lines Inc., Northwest Airlines Corp., ATA Airlines Inc., Aloha Airlines parent Aloha Airgroup Inc. and regional carriers Comair Inc., Independence Air parent FLYi Inc. and Mesaba Airlines parent MAIR Holdings Inc.

It also helped produce fuller planes and much-improved operating results. Passenger unit revenue rose 4.9 percent from January through October compared with a year earlier, according to the transport association.

Supported by strong demand and record air travel volumes, the carriers even managed to quietly raise prices more than they had in years without scaring off passengers. Domestic fares this fall were up more than 8 percent from a year ago, industry figures show, and experts foresee more increases ahead.

“There’s still a lot of pressure for fares to go higher,” said Darryl Jenkins, a consultant to numerous airlines. “We’ve got a robust enough economy that we can raise fares, and ... that will bring a lot of relief to the industry.”

The changes have helped the industry improve its operating results by about $14 billion in the last two years, according to Airline Forecasts LLC, a Washington, D.C.-based consulting firm.

But spending a projected $9.4 billion more on fuel than last year, according to Airline Forecasts, the industry in 2005 is expected to approach its worst-ever loss of over $10 billion in 2002.

“Fuel prices are the difference between record profitability (for some airlines) and a year of crappy losses,” Heimlich said.

The situation looked catastrophic when crude oil surpassed $70 a barrel on Aug. 31 and jet fuel reached $2.60 a gallon — up from $1.16 at the start of the year — a month later. Not coincidentally, Delta and Northwest filed for Chapter 11 bankruptcy in September.

Vaughn Cordle, the financial analyst who heads Airline Forecasts, said the 11 largest U.S. airlines will collectively make money in 2006 if oil averages less than $55 — a level prices flirted with briefly in late fall. But the industry will lose an estimated $365 million for every dollar above that.

Two new factors weigh on the chances of returning to profitability. Carriers’ ability to hedge fuel prices has been sharply reduced by both their lack of cash and high prices. And with so many in bankruptcy or otherwise borrowing heavily to finance restructuring, they face whopping interest costs on their debts, including an estimated $4 billion in 2005.

Airline consultant Robert Mann is skeptical that the recent moderation of fuel prices and increase in unit revenue signifies a turning point, noting that all other predictions of recovery since 2002 have failed.

“Even if there is a slight turn-up, we’re still faced with an industry which from a balance-sheet perspective is bankrupt,” he said.

Industry observers will be looking closely at two post-bankruptcy airlines that could set the tone for U.S. carriers next year.

Experts say the integration of US Airways into America West Holdings Corp. could spawn similar airline mergers, although US Airways Group Inc. said recently that it will continue to report significant operating losses into 2006.

United, meanwhile, is a much leaner and more internationally focused airline as it prepares to exit Chapter 11 in February than when it entered bankruptcy court three years ago.

“United’s going to be the story next year,” industry consultant Alan Sbarra predicted. “If they got the job done, they’re going to be a force to be reckoned with. ... I don’t expect United to have Southwest costs, but they need to get close — to within 10 or 15 percent.”