Struggling airlines’ new challenge: declining demand

Associated Press

ATLANTA — The meteoric rise and fall of the price of oil was the story for the airline industry for much of 2008, but as the year that brought big losses and hefty stock declines for many carriers drew to a close the erosion of demand for seats because of the recession was the main headline.

Airlines cut jobs, made dramatic reductions in capacity, sold aircraft, raised fares and imposed new fees for checked baggage and other once-free amenities to stem the bleeding from losses that were expected, by one estimate, to total $4 billion for the year, excluding one-time items.

Several carriers even flirted with the idea of consolidation, but the only one to succeed was Delta Air Lines Inc., which acquired Northwest Airlines to create the world’s biggest carrier.

Despite all the maneuvering, investors had little reason to cheer during the year — the AMEX Airline Index fell about 30 percent in 2008. That compares to a 40 percent drop for the Dow Jones Total Market Index and a 39 percent drop for the Standard &Poor’s 500 index.

“The stocks got hammered as oil went up and they have not recovered that much, though they have recovered some,” airline analyst Bob McAdoo of Avondale Partners said.

The price of a barrel of oil soared to a record high of $147 in July, causing a major cash crunch for airlines. Some small niche carriers folded or filed for bankruptcy. Even some big carriers were thought to be in danger of bankruptcy before oil prices turned in the opposite direction, plummeting to under $40 a barrel in the final days of the year.

But, instead of rejoicing, airlines faced a new threat in the form of fewer people buying tickets as the global financial crisis took hold. Carriers also were weighed down by bad bets they made on the price of fuel when it was sky-high. After locking in prices that looked reasonable earlier in the year, some finished the year paying substantially more than market price for a portion of their fuel.

The news was bad for most airlines in 2008, though there were some winners.

One bright spot was Allegiant Air LLC, a subsidiary of Allegiant Travel Co. Las Vegas-based Allegiant focuses on flying travelers in small cities to leisure destinations such as Las Vegas, Phoenix, and Fort Lauderdale, Orlando, Tampa/St. Petersburg, Fla. The carrier’s shares rose more than 51 percent for the year.

Delta’s acquisition of Northwest is expected to result in significant cost savings for the combined carrier and give it a strong position in many markets around the world. Relatively quick labor and seniority pacts involving their pilots was good news, and that is expected to speed up the integration process, though deals involving flight attendants and ground workers remain unresolved. Delta shares fell about 27 percent in 2008.

Southwest Airlines Co. was not as hard hit by the soaring price of fuel for much of the year because of aggressive fuel hedging it did in previous years when prices were low. But as the year ended, even Southwest was feeling the pain from the weakened economy, and some analysts speculated that it’s only a matter of time before the carrier joins the rest of the pack in charging fees for first and second checked bags on domestic flights. Southwest’s stock slid about 31 percent for the year.

Meanwhile, American Airlines, a unit of Fort Worth, Texas-based AMR Corp., and British Airways are seeking antitrust immunity for an alliance that would let them work together on pricing and scheduling for flights across the Atlantic, while Houston-based Continental Airlines Inc. is seeking approval to join a trans-Atlantic partnership of several airlines including United Airlines, a unit of Chicago-based UAL Corp., and Lufthansa, which already have antitrust immunity to work together on trans-Atlantic prices and schedules. AMR shares dropped 26 percent, Continental shares fell 21 percent, and UAL shares plunged 70 percent, in 2008.