Posted January 12, 2009 11:20 AM
By Jake Reppert
USA 2008 Retrospective and Outlook for 2009
2008 Overview
While dismal holiday shopping numbers, growing unemployment and bank profit warnings are taking all the wind out of the highly touted New Year rally, most of the US economy is left to look only to the “Obama Bounce” for their next bit of hope. But somewhere between the fuel spike in the middle of 2008 and the financial paralysis that began later in the year, the U.S. airline industry, seemingly as a whole, made the right moves.
Near the beginning of 2008 fuel prices had reached a level where U.S. airlines were announcing intentions to decrease domestic flying while increasing long-haul international capacity. As fuel prices reached record highs near $150/bl the U.S. airline industry acted quickly and appropriately by announcing and effecting capacity cuts across the board, and as hard as it may be to believe they seemed almost agile at times. By the latter part of the year, fuel prices had dropped as quickly as they had risen, but with fuel prices down, the financial paralysis had already begun to hit the high yield passengers at the front of the plane, which essentially pushed everyone ‘back a cabin. ‘ By the close of play of 2008 U.S. airlines had geared up to deal with higher fuel prices, and found themselves in a better position than most to weather an economic recession.
2009 Outlook
With a year of increasing recession behind us, and best guesses putting at least another year of the same in front of us before any start to significant signs of recovery, there are several factors that seem set to allow U.S. airlines to fare better than their counterparts around the globe in 2009, and perhaps return to profitability by 2010.
Downsizing continues, through announced fleet reductions and deferral of orders, capacity has now reached a point where the airlines have regained some of the pricing power they lost when business-class travel took a major hit, and are able to place some upward pressure on their yields. The major threat here lies in the recent holiday season shopping reports that show a major hit to consumer pricing power, which for this theory to hold true, cannot dip much lower. If consumer purchasing power dips too low, the fear is that airlines could lose their recently regained pricing power.
Busted fuel hedges seemed to affect everyone in 2008. Acting in the airlines favour on the balance sheet in 2009 is that most of them have already taken a hit on their books, and are now set to benefit from the benefits of decreased fuel prices.
One bit of luxury afforded the U.S. airlines is that they operate in a country the size of Europe, under regulations that pretty much give them the place to themselves. There are only a handful of true ‘major’ U.S. carriers, while Europe is populated by British Airways, KLM-Air France, Lufthansa, Iberia and SAS to name a few. Operating under this closed-door policy provides a very real sense of protection to their market shares, and protection from international competitors. The fear here is that U.S. airlines are historically known for their pursuit of market share. Should they move away from their downsizing plans and return to a fervent pursuit of market share, it could spell problems for the industry as a whole.
U.S. airlines have found themselves in the right place at the right time, and shown an ability to react to the current crisis. That said, there are very real concerns that need to be addressed when considering this theory. With 2008 behind us and a new year begun we’re promised interesting times in this industry.
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