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Let’s Face It: Airlines Are in Trouble

Has the past week felt like a never-ending parade of grim airline news? Well, that’s because it was a never-ending parade of grim airline news. After a decidedly lackluster first half of the year, the industry finds itself at a crossroads. Let’s recap some recent stories and take a look at what to expect going forward.

First, fuel prices have begun creeping upward. Jet fuel is nowhere near last summer’s astronomical highs, but the cost of fueling planes has risen sharply in the past month. Whether this is the beginning of another price spike or merely a normalization following very low prices earlier this year is unclear, but the 20 percent increase in jet fuel costs couldn’t have come at a worse time.

Why? Because demand continues to be weak. So weak, in fact, that Southwest CEO Gary Kelly thinks it would be “crazy” to expect any significant improvement soon. So with rising fuel costs and insufficient passenger revenue, the airlines find themselves in a tough spot. What to do?

If you’re Delta or American, you cut capacity and lay off employees. And before you get on these airlines’ cases, realize that it’s likely that more carriers will follow with cuts of their own. The sad truth is that carriers need fewer routes and employees because they’re serving fewer passengers—they simply can’t afford to fly empty planes. Airlines will also continue to lean on their fees, which have brought in hundreds of millions of dollars and therefore are a major—and likely permanent—fixture in the industry.

Lastly, airlines may have to stop selling seats for bargain basement prices. 2009 has thus far been a bonanza of cheap fares, which is great for travelers looking to snag a deal. But those low fares don’t bring in enough revenue for the airlines, especially with business travel suffering. So as the year progresses, we may see airlines trying to push fares upward, or at least cut back on the sales.

The big question, of course, is whether or not all our major carriers will survive the recession. The AP published a nice Q&A that addresses the major factors facing carriers individually as well as the industry as a whole. I don’t happen to think it’s likely that any major airlines will fail during the next six or eight months, but some may come close.

The big takeaway from all this is simple: The airline industry is in trouble, and travelers are likely heading into another uncertain period, much like we faced last summer.

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