The airline industry is once again showing, to borrow from Abba Eban, that it rarely misses an opportunity to miss an opportunity.

The price of oil is posing the latest break. Prices have fallen dramatically since a recent intraday high of $77.40 per barrel on the New York Mercantile Exchange on Aug. 9. Oil closed under $64 a barrel Tuesday.

But for airlines, the benefit of the drop in oil prices has so far been limited, and it is unclear whether even a further decline would have much impact, given recent signs that demand for air travel has started to drop off.

Slowed Travel, Stalled Revenue

Since Aug. 9, oil prices have declined by roughly 17%, while the Amex Airline Index has been flat, following a surge on Tuesday.

In recent days, a half dozen airlines have pointed to a slowdown in the growth of revenue per available seat mile (RASM), an important industry indicator, citing factors including security concerns, Hurricane Ernesto and increasing industry capacity.

Continental

(CAL) - Get Report

said bookings slowed in September.

AirTran Airways

(AAI)

revised RASM estimates.

Revenue also grew more slowly than expected at

JetBlue Airways

(JBLU) - Get Report

,

Southwest Airlines

(LUV) - Get Report

and

US Airways

(LCC)

.

The slowdown could possibly signal an impending end to a favorable alignment that has included high demand for air travel and a reduced supply of seats, due to capacity reductions undertaken in a series of bankruptcies.

Historically, the airline industry has been a bad place for investors, sustaining cumulative net losses of nearly $17 billion since the Wright Brothers first flew. Because of long lag times for aircraft deliveries, carriers often place orders when the economy is growing and take deliveries when the economy is slowing.

Additionally, industry pricing is often set by carriers with unique agendas -- by bankrupt Eastern, locked in a battle with its unions and creditors, between 1989 and 1991; by Independence Air, trying to implement an improbable business plan, in 2004 and 2005; and recently by Southwest Airlines, which has been deriving much of its income from fuel hedges.

"The real question is, if and when fuel prices decline, will airlines reap the economic benefits?" says Chris Lozier, airline analyst for Morningstar. "Over six decades of history, airlines have consistently competed away their profits," Lozier says. "So the beneficiaries could largely be the passengers."

At What Cost Oil?

In the current cycle of oil price declines, much of the benefit has been minimized because prices were high early in the quarter, AirTran CFO Stan Gadek said in an interview.

"People are overlooking the fact that fuel ran up at the end of July and that during August, it was close to an all-time high," Gadek said. "It went way up above where we had forecast, and I was concerned that we would have to up our guidance.

"Then the conflict (in Lebanon) ended, and Ernesto did not take out refineries in the Gulf, so prices and futures have fallen and we are getting some benefit," he said. "But it is simply going to offset the run-up that we had. In the fourth quarter, if prices continue at these levels, you will see much more savings."

It is not unreasonable to expect oil prices to continue at their current level or even dip to around $60 a barrel, says Bart Melek, senior economist at BMO Capital Markets in Toronto.

"Supply is outpacing demand," Melek says. "Since the third quarter of 2003, there have been a billion barrels of increased inventory around the world. It doesn't take a particularly brilliant mind to think that will lead to lower prices."

Nevertheless, Melek says a risk premium is justified and is likely to keep prices from dropping significantly below the $60 range. "It is not a particularly normal time in history," he says. "Around the world, we are overproducing a little bit, but there is no excess capacity, and if anything were to happen, that surplus would disappear very quickly."

Chances for a Lower-Price Catalyst

In a report issued Monday, optimistic JPMorgan analyst Jamie Baker said declining fuel costs could drive stock-price increases even as demand falters. It is a viewpoint that contributed to Tuesday's run-up in airline stocks.

"Just as sector fundamentals adapted to higher crude (via bankruptcies, fare increases, capacity discipline and so forth), we're confident carriers will similarly respond to slightly softer demand trends," Baker wrote. "We believe continued equity upside is increasingly becoming an oil story vs. the unrelenting-demand story of just a few months ago."

But Spirit Airlines CEO Ben Baldanza said in an interview that it's early to get excited about oil price declines and suggested he will wait until prices dip below $60 a barrel.

"Sure fuel prices are going down now, but they are still at historically high levels," Baldanza said. "People will be excited when the price per barrel starts with a five, not with a six."