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Airline Profits Hit Turbulence


Carriers struggle through recession, swine flu.

Airlines just can't catch a break.

Last summer, as fuel costs rose skyward, US carriers scrambled to dream up new fees and hidden charges to try to stay afloat. A few -- like Aloha, ATA, and Frontier -- didn't make it, and a new wave of bankruptcies slammed the industry.

Then, as crude-oil prices eased earlier this year -- and airlines very quietly left baggage, food and other junk fees in place -- many hoped the industry would soon soar back to profitability. But the deepening global recession, steadily rising oil prices, and the swine flu "epidemic" may have grounded their nascent recovery.

According to Bloomberg, the International Air Transport Association, or IATA, a trade group, doubled its loss estimates for the world's biggest airlines. After forecasting a total loss for the industry of around $4.7 billion as recently as March, the group now expects losses to top $9 billion in 2009. In fact, North American carriers could blow through as much as $1 billion.

And the depression in demand isn't just coming from fewer vacationers -- or from frightened international travelers forgoing those Mexican vacations. Business customers are also leaving expensive business-class and first-class seats in droves, opting to economize. Cargo demand, the IATA says, could tumble 17% this year as less "stuff" is sent around the globe.

Ticket price competition is stiffer than ever, despite drastic cuts in such perks as bringing along luggage on that 3-week vacation -- as well as on meals (while we appreciate that Continental (CAL) is the last US airline to give out more than a 3-pretzel munchie mix, its week-old cheeseburgers entombed in plastic can hardly be called a "meal"). Online travel sites like Orbitz (OWW), Travelocity and Kayak keep airlines honest, rewarding travelers who take the time to seek out the lowest fares.

Air travel, now that frills have been all but removed from the flying experience, has been commoditized. Differences between airlines are barely perceptible, with the notable exception of upstarts like JetBlue (JBLU) and Virgin America, which offer travelers an alternative to the truly banal experience of flying American (AMR), or the feeling of being herded like cattle courtesy of Southwest (LUV).

While the industry struggles to realign partnerships, cut costs and lobby governments for more subsidies, major carriers would be well to learn from those few intrepid entrepreneurs seeking out opportunity amidst the storm. As Virgin Group founder and president Sir Richard Branson, said when he convinced investors to pony up more than $300 million to launch the company in early 2008, "We're going to shake up the market."

Indeed. Let's hope he succeeds.
No positions in stocks mentioned.

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