Don't look now, but after a year of gloom and doom driven by high oil prices, bankruptcies and liquidations, talk of the "p" word is creeping back into the airline business.
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J.P. Morgan analyst Jamie Baker in a research note Wednesday throws out the possibility that the airline business could post record profits in 2009 should fuel costs continue their downward trend and airlines keep capacity cuts in place. Oil price declines generated $3 billion in incremental potential fuel savings in the last week alone. Those savings, coupled with better pricing power thanks to fleet trimming and new revenue streams such as increased bag fees, could put airlines well into the black next year.
"While far from assured, the potential for record 2009 profits is likely to strike many by surprise, in our view, hence we figured might as well be the first to point out the math," Baker wrote.
Better times could also delay any further industry consolidation, as airlines tend only to merge when times are bleak. The current downturn, for example, helped spur Delta Air Lines Inc.'s pending takeover of Northwest Airlines Corp., and generated significant discussions among other carriers.
Of course fortunes could quickly take a turn for the worse if OPEC members succeed in reversing oil's decline or a late-season hurricane makes a direct hit on the Gulf of Mexico, where much of the U.S.' domestic oil is produced. But if nothing else, the fuel price reprieve has almost certainly slowed airline cash bleed, lessening the chance of worst case scenario of industry bankruptcies in 2009 and likely ending any talk of beneficial liquidations. And even if the profits don't materialize, a lack of new filings would at least be some cause for celebration. - Lou Whiteman
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