Airline Execs See A Better '09

Domestic airline executives this month struck a tone of optimism despite a bleak economic environment, slowing demand and falling revenue, as declining fuel costs and aggressive 2008 capacity cuts are setting the stage for profits in 2009.

Because U.S. carriers spent much of 2008 recalibrating their businesses to combat fuel costs through efficiency gains, capacity cuts, headcount reductions and ancillary revenue initiatives, they can not only weather the economic downturn but also profit during it, airline executives told investors at this month's Credit Suisse Global Airline Conference in New York.

"While a soft demand market may be unfortunate, in some respects you probably couldn't find a better time in the history of the airline business to have a recession," said JetBlue Airways treasurer Mark Powers.

US Airways CEO Doug Parker told the conference, "It's going to be a better year in 2009, which is different than what most other industries can say in this economic environment." Parker said the run-up in fuel costs during the first part of the year "in some ways forced the industry, before the economy softened, to do the things we needed to do," including cut capacity and introduce ancillary fees.

"During the past year, several smaller carriers have disappeared, and this, along with the capacity reductions, results in an industry that is significantly smaller than it was a year ago," said Beverly Goulet, American Airlines vice president of corporate development and treasurer. She said the capacity removed from the domestic system—more than 9 percent of December 2007 levels—amounts to that of a "very large airline."

Continental Airlines senior vice president of finance and treasurer Gerald Laderman added that the reduction in capacity also helps the industry face what has been determined to be a sustained economic recession. Laderman called those cuts, enacted in response to high fuel costs, the "right thing for wrong reason." He added, "Oil is back down to a more manageable level, but it was nice the industry cut capacity, given the economic slowdown."

Airlines posted poor November traffic figures with double-digit percentage declines in passenger traffic. During the Credit Suisse conference, US Airways' Parker gave the most detailed traffic outlook, despite "limited visibility." He said, "November was very soft, December looks better than November and January looks better than December." He added, "The cutbacks in capacity have been extremely helpful. While demand is down, so is capacity, so you're not seeing the typical declines in revenue per available seat mile." Parker said, "Most people are predicting RASM improvements in '09."

Noting this summer's fuel price peaks, Continental's Laderman told investors next year's trend doesn't suggest "significant rises again in the price of oil," which "gives us and the industry some breathing room" as demand and revenue deteriorate.

"Clearly the market is saying demand will be very poor in 2009," said UBS airline analyst Kevin Crissey, but added that revenue declines likely are not enough to offset gains from lower fuel pricing. Using American and US Airways as "a proxy for the industry," Crissey in his modeling said revenue would have to drop 9 percent to 13 percent to generate share declines like those witnessed earlier this year. That, he noted, is "unlikely."

Delta Air Lines president Edward Bastian said demand would have to drop in excess of 20 percent "to offset the amount of fuel savings we're seeing."

Meanwhile, Southwest Airlines CEO Gary Kelly said, "We are still in the money with our fuel hedges here in the fourth quarter," but also said the carrier "will be de-hedging a bit, down to 63 percent coverage" at a capped price of $73 a barrel for 2009. If oil prices remain constant, Southwest could post losses on its hedges, rather than the 2008 gains that kept the carrier on a different competitive plane.

Still, Kelly said, "We will want to remain hedged. We're out of business at $200 crude oil. $50 crude is a problem, but it just has to be managed."

Delta hedged its oil position for next year, saying that 74 percent of the carrier's 2009 consumption "will participate at today's market level of fuel." Bastian noted Delta expects to pay about $100 per barrel in 2008, but is poised to reap a $5 billion benefit in fuel savings in 2009.