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Quick Hits: Airline Profits to Take Off in 2009


Brief scrutiny of today's headlines.

Major US airlines appear to be headed for a return to profitability next year - a stunning turnaround for an industry battered by record-high fuel prices.

But the industry faces a new challenge: Business and recreational travelers are cutting back. Airlines have slashed costs by reducing flights and retiring old aircraft while raising fees on current services, or instituting new fees on checked baggage and other items. Such moves put the airlines in a good position to generate profits in the future.

Airlines have sharply reduced the amount of paper needed for a ticket, and are experimenting with new ways to reduce costs and make money. Advertisements may soon be common on airline boarding passes, creating a new source of revenue.

Northwest's (NWA) revenue has declined by only 1.2%. That works out to about $150 million, an amount easily overcome through savings generated by its recent merger with Delta (DAL) and lower fuel prices - and that's before the new sources of revenue kick in.

Nevertheless, several airlines have been forced into bankruptcy.

The Delta-Northwest merger may trigger a new round of consolidation in the airline industry. United Airlines (UAUA) and US Airways Group (LCC) called off a planned deal in 2001 after the Justice Department threatened to sue because the combination would have resulted in higher fares and reduced service.

Pricing power will tell the story. Some airlines raised fares and required an overnight stay, often an impossible combination for business travelers. Lower fuel prices may mean an easing on fare restrictions and that could further increase traffic.

If the industry rebounds, the deathwatch on legacy carriers such as American Airlines (AMR) and United probably can be postponed. Profits will keep 'em flying.
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