Monday, June 8, 2009

Airlines Scrape By, but What They Really Need Is a Shakeout

By DANIEL MICHAELS The airline industry has delivered a surprise amid cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 global economic meltdown -- it didn't collapse. Even in boom times, flying people around generates dismal profits. During downturns, carriers often bleed red ink. This time, however, airlines are scraping by, which is good news in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 short term for both cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365m and budget-minded travelers. But carriers' ability to survive this crisis may paradoxically bode ill for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir long-term profitability. The global airline industry needs a major shakeout before it can generate sustainable returns. Airlines are unquestionably in bad shape. As many of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365m gacá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r Monday in Kuala Lumpur, Malaysia, for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 annual meeting of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir trade group, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 International Air Transport Association, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 crisis-prone club will probably proclaim this one of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir worst crises ever. IATA predicts its members will lose $4.7 billion this year and plans Monday to update cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 increasingly pessimistic forecast. International passenger traffic fell by 9.1% in this year's first three months compared with cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 same period a year earlier, IATA says. During that quarter, revenue from pricey first- and business-class tickets plunged by as much as 40%. Air cargo -- a leading indicator of both passenger traffic and broader economic trends -- has dragged along at volumes more than 20% below year-earlier levels since November, which points to a continued slump for airlines and cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 world economy. Airlines' chronic problem is familiar to any Econ 101 student: Too much supply -- of planes and seats -- chasing too little demand. In some industries, discounts jump-start demand, lifting sales volumes and boosting profits. For airlines, "lower pricing doesn't necessarily boost revenue," says David Swierenga, who runs AirEcon, a consulting firm in Vienna, Va. The demand airlines need is from passengers who can pay fares that are high enough to cover carriers' costs. For fliers, that glut means bargains. Unsold tickets are useless once an airplane door closes. When carriers get desperate, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y ignore cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir costs and instead scramble for cash by dropping prices. "Competition does bring down prices, which brings down profitability," says Peter Morris, chief economist at Ascend Worldwide, an aviation-consulting firm in London. "But speaking as a consumer, I say, 'Hooray,' " he adds. Service can be abysmal, as domestic U.S. passengers know, but we get what we pay for. The inflation-adjusted price of an airline ticket has barely budged -- or has even fallen -- over recent decades. This summer, fares globally are down roughly 15% overall compared with last year, analysts say. Business class offers some of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 most extreme markdowns: UAL's United Airlines and British Airways, for example, are both offering two-for-one sales or 50% discounts in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 front cabin between cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 U.S. and London. Yet only a handful of small carriers have gone out of business over cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 past year. After cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Sept. 11, 2001, attacks, more than a dozen major players disappeared, filed for bankruptcy protection or flirted with insolvency. Airlines in April showed cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir tenacity by filling three out of every four seats on international flights, according to IATA, which would be a strong showing in good times and is remarkable during a crisis. U.S. airlines, which struggled for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 past decade, have led cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 industry in adapting. When oil prices soared last spring, American carriers slashed cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir fall schedules and fleets to cut expenses. Then fuel costs plunged, but demand did, too. Thanks to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 precautionary cuts, U.S. airlines -- perhaps for cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 first time ever -- were braced in crash position when cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir market tanked last fall. European and Asian carriers belatedly followed. Airlines averted a blood bath because, after years of belt-tightening, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y know how to cut back just enough to survive. Even as fares drop, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365y are ginning up ocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r revenue sources, such as charging for checked bags. They also are expert at extracting concessions from staff and suppliers. Anocá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r factor is cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 industry's odd magnetism, which has reliably enticed people with a lot of cash to bankroll moribund carriers. That's despite airlines' formidable track record of failing to cover cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir cost of capital, be it debt or owners' equity. The net result of this mix is that airlines globally made no net profit on revenue of $3.6 trillion in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 decade through 2007, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 most recent year for which data are available, according to cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 Air Transport Association, U.S. carriers' trade group. To fix that, carriers need sustainable pricing power. Airline executives and analysts say cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 only way to gain that is through a serious culling. "If airlines don't cut enough now, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 industry will come out of cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 downturn with too much capacity to make money in cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 upturn," says Chris Tarry, an independent airline analyst in London. The mass extinction that looked imminent when fuel prices soared last year might still happen. If oil prices continue cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365ir recent rise, if credit markets don't thaw, or if demand plunges furcá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365r, carriers may be forced to shrink more drastically, and some may fail. But with signs cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 global economy has hit bottom, cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 prospect for dramatic upheaval amid cá cược thể thao bet365_cách nạp tiền vào bet365_ đăng ký bet365 airline industry's pain looks increasingly remote. Write to Daniel Michaels at daniel.michaels@wsj.com

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