Losses Mounting, Demand Down, the Airline Industry Remakes Itself

Let's get to the takeaway first: Enjoy those cheap fares ("Not valid on routes where competition is scant, valid only on routes where airlines are desperate to hold onto market share and fill seats, Saturday night stay and other onerous restrictions reply," as the TV commercial hucksters say in rat-a-rat voices).

The airline industry is currently shrinking itself and doing everything else possible to get people into seats at higher prices.

It's going to take them a while, and it'll be ugly. There will be casualties, as they say. But by this time next year, once the airlines get traction with an economy that is probably going to start improving by the third quarter, my prediction is that our national air-transportation system will be smaller, costlier and less convenient than at any time in decades. And some form of federal re-regulation is coming back, too.

Right now, airlines haven't been able to shrink capacity fast enough to match the totally unanticipated sharp plunge in demand that began manifesting itself with the economic collapse last fall. They're working on that, rest assured.

In a report today, OAG, the air-schedule-data company, says world airlines had 6.7 percent fewer flights scheduled for the first quarter compared with the 2008 first quarter, which OAG says marks the first downturn in flights since 2002, when the industry was still staggered from 9/11 and the aftermath of the dot.com bubble-burst.

Within North America, the number of flights is down 8.7 percent, with a capacity reduction of 7.7 percent in the first quarter.

Flights, capacity and demand on the key North Atlantic routes are all off sharply. This is very bad news for domestic airlines that bet heavily on growing revenue (especially premium-cabin revenue) on these routes, where they had sharply increased capacity in recent years. They're now reducing that capacity.

Meanwhile, the International Air Transport Association today sharply revised its forecast for airline losses this year. The world airline trade group says that global airlines are expected to collectively lose $4.7 billion in 2009.

That's a revision of the last forecast by IATA, which said in December that the world's airlines would lose $2.5 billion this year.

"2009 is shaping up to be one of he toughest years the airline industry has ever faced," Giovanni Bisignani, the head of IATA, said in a press conference today in Geneva.

Fuel prices have come way down from the night-shrieking peak of almost $150 a barrel last July (but they've been bobbing up lately, to over $54). The airlines' main problem this year is the plunge in demand.

And for the airlines that made those big bets on premium business-travel, the news keeps getting worse. Premium traffic was down 16.7 percent in January and there are no signs that it's recovering.

The good news (good for U.S. airlines, not so good for customers now getting used to cheap fares on selected routes) is that airlines in North America will out-perform those in the rest of the world this year. Said Bisignani: "Why? Because they cut capacity early ... They will basically break even."

(Today at a gathering for the media in Tempe, Arizona, US Airways said it has positioned itself well enough that even if passenger revenue drops 15 percent this year, it expects to earn a profit for 2009.)

This year, most U.S. airlines will continue cutting capacity and routes to reduce supply in line with demand, and ultimately reclaim pricing power. That's going to be the hairy part, in a fiercely competitive environment where it's clear that not all airlines currently flying will survive.

Expect two things:

1. They will continue shrinking the system strictly on yield-management principles, cutting service where the yields are lower, basic national air-travel needs aside.

2. At some point, the federal government will start paying attention to the growing crisis in air service in many areas of this country, and the feds will get involved with some form of re-regulation.

We'll see how that all works out. But no matter how you cut it, fares will eventually go up.

Meanwhile, it's a wonderful time for leisure travel. Assuming you're flexible, the fares (and hotel deals) are spectacular.

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