Where is the Airlines Industry is heading? Part One

Yet again another losing quarter for the global airline industry, despite undertaking painful cutbacks in operating and capital expenditure. The solution for moving forward for this hard hit industry is a consolidation.

How many more seats can the airlines operators pull from the sky? Apparently not enough to turn the industry around for a sustained period.

The nine largest U.S. airlines which accounts to about 88% of all domestic traffic lost a collective $1.5 billion during the recently completed second quarter.

Based on recent survey by the airline analyst, revenue for the third quarter is expected to decline at a rate 20% or so for most big carriers from the same quarter in 2008, as business and leisure travelers continue to cut back. The July load factors that airlines are expected were close to 90% full.

Now poses a few questions that needs to be answered - The problem? Are they too many planes in the Sky?.

With the economy in the process of recovering from a setback of curtailing demand for air travelling, cutting the supply of seats only goes so far when they're spread among nine major carriers, plus regional competition.

The industry is essentially engaged in an ongoing fare war among airline operators, a tough way to price seats high enough to cover costs. An improving economy, inevitable at some point, figures to push oil prices as much as customer demand. Will carriers ever be able to set prices optimally to increase profitability?

A plan of spreading out 88% of the domestic flying public among six airlines would work a lot better than spreading them among nine. Until then, it's a dim future for as far as we can see in the coming years.

The majors operators are advised adopt a policy of cost cuts and increase revenue by at least 15% in order improve marginal profits and upgrading their aging fleets. The problem arises, is that most carriers have been through big restructurings either in or outside of bankruptcy, leaving little room for further cost cuts in costly infrastructure which includes equipment, terminal rentals and expensive labor.

According to recent studies, it is expected most major carriers, including Delta, JetBlue and Air Tran, to post operating profits in 2009, but thin margins offers little cushion against any possible one-time costs that might occur that would eventually consume available operating profits.

The biggest problems, though, are at U.S. Airways and United, both of which could easily land in bankruptcy in less than a year,due to low market caps and a lack of unencumbered assets to borrow against makes raising cash a problem.