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The Honolulu Advertiser
Posted on: Tuesday, January 17, 2006

Airline industry 'on cusp of a recovery'

USA Today

FORT WORTH, Texas The most remarkable news of 2006 might turn out to be that the long-beleaguered U.S. airline industry turns a profit or comes close.

For the first time in more than a decade, all four of the airlines' key economic drivers supply of airline seats, travel demand, operating costs, and fares are moving in the right direction, at least from the perspective of U.S. airlines. As a result, a growing list of airline bulls says that 2006 should show vast improvement from a disastrous 2005 in which U.S. airlines collectively lost an estimated $10 billion.

For consumers it means higher fares and fuller planes. But for the industry, relief is overdue after five miserable years of the worst downturn ever in commercial aviation. Even established skeptics, including analyst Vaughn Cordle of AirlineForecasts, agree that "the industry is on the cusp of a recovery" in 2006. And, Cordle says, it could turn into a "major recovery" if oil prices fall more than expected.

Industrywide profit this year remains unlikely to a large extent because of continuing deep losses by Delta Air Lines and Northwest Airlines, both in Chapter 11 bankruptcy since September. But many on Wall Street say the profit outlook is good for money-making discount giant Southwest. Further, they say, some of the most troubled big carriers in the past few years stand a good shot of moving into the black.

In particular, American Airlines, the United States' largest carrier, and No. 5 Continental Airlines are both well-positioned for turnarounds. US Airways formed in September when America West acquired the old US Airways out of Chapter 11 bankruptcy and adopted its name also could turn a profit in 2006. No. 2 United is expected to emerge from Chapter 11 in the first quarter, but it's not expected to earn a profit before 2007.

JPMorgan's Jamie Baker is among the most bullish Wall Street analysts. A year ago, he and others fretted about a high-cost industry "not built for $40 oil." Now, with oil hovering above $60 a barrel, he believes the strongest carriers will be profitable. Baker says he is more optimistic about the industry's "near-term fundamental prospects than at any time this decade."

Analyst Robert Ashcroft, who left UBS last year but continues to track the airline industry, says, "It shouldn't be a surprise that we're getting a transition year. The surprise should be that it took so long to get here."

Still, Ashcroft tempers his optimism: "Every year since 9/11, we have been looking for a transition year, but something kept it from happening. SARS. War. The economy. Hurricanes. Oil prices. Now, it looks like this may finally be the year. But my fear is that we'll wake up tomorrow and find that it's yesterday all over again."

Veteran airline consultant Julius Maldutis puts it more succinctly. Airlines "have a disturbing knack for screwing it up," he says.

Some industry analysts have more modest expectations. John Heimlich, chief economist at the Air Transport Association, the industry's trade group, cautions that even under the rosiest 2006 scenario, the industry is "not out of the woods yet."

Last year, rising fuel prices and persistent low fares pushed the big network carriers into making the deep cuts in flying capacity they had long resisted. Many of the planes removed from the domestic market didn't go away they were shifted into international markets where fares and demand are stronger.

But in the domestic market, the number of airline seats for sale this month is down 5 percent from a year ago, according to a USA Today analysis of data from Back Aviation Solutions. That's 128,000 seats per day that are no longer available for sale, and the constricted supply makes it easier for airlines to get a better price. That drop in capacity, and a nearly 5 percent increase in passenger miles flown in 2005, pushed the percentage of seats filled to record levels in 2005. Even now, in the slowest time of the year for air travel, almost eight out of 10 seats are filled with paying passengers. In effect, that means most planes on popular routes, and most prime time flights, are flying full.

It also helps the carriers that a lot of the demand is coming from business travelers. Business fliers these days typically don't pay the kind of premium prices they did in the go-go days of the late 1990s. But they still are time-sensitive and willing to pay significantly more than price-sensitive leisure travelers.

"The corporate players that pulled their horns in on travel back in 2002 and 2003 are getting back out on the road pretty significantly," says David Cush, general sales manager at American, the world's largest carrier. He estimates about a 10 percent increase in the annual growth in business travel at American in the past year. That reverses a trend in which corporate demand had fallen every year since the all-time peak in 2000.

Leisure travel demand also has continued to grow this year despite fare increases, Cush says.

Not every industry watcher sees a significant improvement this year.

Calyon Securities analyst Ray Neidl says the risk of additional airline bankruptcy filings has faded for now. But "the market has over-reacted" to positive developments in the industry, he says. Despite an outlook that he agrees is improving rapidly, Heimlich, the ATA's forecaster, still projects an industry loss of $1.5 billion to $2 billion for 2006.

"It's a bipolar world," he says. "Some carriers like Southwest will have nice profits. But others could lose a lot. It's hard to imagine 2006 not being the best year since 2000, but that could still mean an overall loss for the group."