Airlines Face More Uncertainty

Something's got to give for U.S. airline companies.

A slew of factors have battered the industry. If external shocks such as the 9/11 attacks and the SARS outbreak were not enough, the industry has its own deadly dynamics -- tough price competition from low-cost upstarts and industry overcapacity -- which make it tough for any single airline to raise prices. Add to that sky-high fuel costs, and you have a recipe for disaster.

U.S. airlines likely will lose at least $6 billion in 2004, following a total of $23.21 billion in losses over the three previous years, according to the Air Transport Association of America.

Even if crude oil falls $5 a barrel from its current level of about $50, losses for 13 of the nation's biggest airlines will come in around $3 billion next year, assuming current cost structures, said Vaughn Cordle, chief analyst and founder of Airlineforecasts LLC.

"This is unsustainable," said Cordle, who also works as a senior 777 captain at United Airlines.

Two network carriers, United parent UAL (UALAQ) and US Airways (UAIRQ), are operating under Chapter 11 bankruptcy protection, and low-cost ATA Holdings (ATAHQ) filed for Chapter 11 bankruptcy protection last week. Hawaiian Airlines' parent Hawaiian Holdings (HA) is also operating under bankruptcy protection.

In such an environment, an industry shakeout seems sensible, even inevitable, much like what happened to the steel industry. But consolidation is unlikely; the difficulty of integrating employees, particularly pilots, who have been working under different pay and seniority scales, makes mergers largely out of the question.

"It doesn't make sense for airlines to merge and push themselves together because of the seniority schedule, and the way that's set up," said Helane Becker, airline analyst at The Benchmark Company, a New York-based brokerage. "Merging two airlines, especially two unprofitable ones, just doesn't make any sense."