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Winging It: With new formula, airlines may profit

After years of struggling to make money consistently, the American airline industry may be finding the right formula: flying fewer planes and charging more.

After years of struggling to make money consistently, the American airline industry may be finding the right formula: flying fewer planes and charging more.

Wall Street analysts and other experts expect the airlines to make a small profit in 2009, the result of the plunge in fuel prices, a steady stream of fare increases, revenue from fees and savings from parking hundreds of airplanes that weren't flying full. And this is in the worst economic climate in decades.

In this downturn, it looks as if the U.S. airlines won't try to fill empty seats on domestic flights the way they have in past recessions, using deeply discounted fares.

But there's some good news for customers: International fares are expected to be as low or lower in 2009 than they were this year, mostly because both foreign and U.S. carriers haven't cut their available seats on overseas flights as much as they have reduced domestic capacity.

The huge spike in oil prices last summer was largely responsible for the American industry's prospects next year. Crude oil prices peaked in July at $145 a barrel. More recently, the worldwide recession has driven down demand so much that oil has sold for less than $50 a barrel. The high fuel costs airlines had to pay earlier in the year will mean close to $4 billion in losses for 2008, the analysts estimate.

But as fuel prices soared, airlines that saw their very existence threatened responded by planning big cuts in capacity for the fourth quarter and next year. In 2009, airlines will be putting 5 percent to 15 percent fewer seats in the sky each day than they had a year ago.

"They've learned capacity discipline," said Kevin P. Mitchell, chairman of the Business Travel Coalition, the Radnor group that represents corporate travel managers. "It was the near-death experience they had last summer."

The airlines should be profitable in 2009 even if the recession causes a 10 percent decline in revenue, on top of a smaller revenue drop in this quarter. Industry consultants say the bottom would have to completely drop out of demand, with revenue falling 20 percent or more, to overtake what airlines are saving from lower fuel costs and cutting capacity.

Robert Mann of R. L. Mann Co., a Port Washington, N.Y., aviation consulting firm, explained it this way: When the airlines' fuel expense spiked last summer, it was responsible for 40 percent of their operating costs. With fuel now down so drastically, it's just 20 percent of operating costs - a 50 percent drop in the largest single expense airlines have.

"Airlines, of necessity, did a tremendous job of building their systems to deal with $100-a-barrel oil," Mann said. "They cut capacity down to what customers were willing to buy. The only thing that will disrupt profits now would be if revenues were to drop by 20 percent."

Even during the Great Depression of the 1930s, Mann said, demand for intercity travel, by air, rail or bus did not drop anywhere near 20 percent.

Many airline customers already know what "capacity discipline" means. There will still be plenty of discounts available, especially if you're willing to take connecting flights. But overall, domestic fares will be painful. Even business travelers who can plan trips months in advance will feel the pinch from rising ticket prices.

Alex Wong, a Center City resident who works for a Silicon Valley software developer, reported to me last week that he was stunned by the magnitude of the fare increases he faces for his monthly trips to San Jose, Calif.

"My last experience was weird," he said. "The fare on US Air in February was $230. The same trip in March would cost $500 to $600."

But Rick Seaney, the chief executive at


, says capacity increases on international airlines mean that fares for overseas travel could be heading down.

"There was a rush to make more seats available on these higher-margin flights, but some of these seats are flying empty, which means they are being discounted," Seaney said on his Web site last week. "Add to the equation the fact that fuel price drops can more dramatically change the cost structure of international flights with their newer, more fuel-efficient aircraft - and that adds up to good news for passengers."