After Brief Respite, Airline Industry Is Heading Back Down

Last summer, the airline industry looked like it was heading toward another rash of bankruptcies. Fuel costs were at record levels because of $147 oil. The economic slowdown was already reducing passenger loads.

Then cutbacks in routes and employees coupled with oil moving back below $60 created the illusion that the global airline industry was out of the woods. Stocks in the companies moved up sharply. The big carriers had driven down costs enough to be fine.

The situation was too good to be true. While the industry had taken out significant expenses, it could not keep up with the falling customer demand that accompanied the deepening recession. Now, it looks like 2009 could be much worse for airlines than 2008 was, and the specter for bankruptcies is returning.

According to Reuters, “World airlines are set to lose $4.7 billion this year as a result of the global recession that has shrunk passenger and cargo demand, industry body IATA said.” That is almost double the association’s estimates in December.

The dangerous effects of losses are already taking a toll on airline stocks. Shares of AMR (AMR) are back near a 52-week low at $3.18. That is down over 70% in three months. Shares in Continental (CAL) and Delta (DAL) are off by almost 45% during the same period.

While none of the US carriers may ultimately file for Chapter 11, which has been a popular way to cut costs in the airline industry for decades, there may be more mergers in an attempt to chop operating expenses. AMR may not be an independent operation at the end of the year.

Douglas A. McIntyre