For Airlines, Demand Matters More Than Earnings

If the world economy is going to be smaller going forward, the U.S. airline industry was ahead of the curve.

Carriers have downsized dramatically since the summer travel season ended, preparing for a world of $140-a-barrel oil. They have eliminated older aircraft and marginal routes that account for about 10% of nationwide capacity, and they have implemented fees that are expected to add hundreds of millions in annual revenue for the major carriers.

Since then, oil prices have fallen steeply, setting the stage for what many people see as a profitable 2009. The wild card is whether the financial market turmoil will impact demand, but so far industry cuts appears to have offset any impact from a potential decline in travel.

With airline earnings reports set to begin this week, observers will be closely watching for news on future booking trends.

AMR(AMR Quote) and Delta(DAL Quote) will report on Wednesday, while Continental(CAL Quote) and Southwest(LUV Quote) will report on Thursday.

At US Airways(LCC Quote), "bookings remain solid and we're not having any trouble filling up airlines," CEO Doug Parker said in a recent interview. "But you can't help but be concerned."

UAL(UAUA Quote), the parent of United Airlines, moved to cut fall and winter capacity, a decision that was "very timely, largely driven by high oil prices but just before the [financial] crisis had arrived," CEO Glenn Tilton told ATW Online last week. United cut capacity by 16%.

Tilton said United has not seen any significant drop in passengers during the current quarter, although there is "some softening" in forward bookings for next year.