How to Make Money (Even When Business Stinks)

More than a dozen airlines trooped to New York this week for a Credit Suisse aviation conference, where they outlined current business conditions and their plans for 2009. The big news? Domestic capacity cuts and dramatically lower fuel costs may have helped unearth the Holy Grail for this messy industry: How to operate in a counter-cyclical fashion to the economy. While next year looks extraordinarily weak in terms of global economic conditions, most carriers plan to cull seats further — and are likely to turn a profit. Has that ever happened for them during a recession?
“Net net, domestic capacity cuts of roughly 8-10% suggest airlines are estimating the supply-demand dynamic approximately right,” CS airline analyst Daniel McKenzie wrote Wednesday in a note to clients. “The industry does need to cut 5-10% more capacity on our outlook, but the collapse in fuel prices remains a good earnings shock absorber.” But wait – there’s more.
This dynamic is playing out at the same time airline consolidation seems to be winning friends and defusing enemies. Northwest is history, now part of Delta (DAL), and British Airways and Qantas are talking about a merger of some sort. On Dec. 3, Lufthansa announced that its board had agreed to acquire a controlling 41.6% stake in ailing Austrian Airlines, barely two months after buying an 80% stake in UK airline bmi. Those deals came after Lufthansa acquired SWISS last year, and bought 19% of JetBlue (JBLU) – a stake practically no one thinks will be its last in the New York budget carrier. And the list continues: Ryanair (RYAAY) remains on the prowl for Aer Lingus and Iberia would like to dispose of itself in a sale to British Airways. The basket case that is Alitalia will soon be history, as an investor group takes over and either Air France or Lufthansa likely to become an international alliance partner of one sort or another.
In the U.S., United (UAUA) and US Airways (LCC) both look like large players ripe for a takeover – or sale of a sizable stake – in 2009 or 2010, if hard times squeeze them further. So, the point being, consolidation in the airline industry is alive and well. An Obama administration, friendly to organized labor or not, is simply not going to jump in and obstruct many airline deals for the sake of ideology. That era is over.
Over time, consolidation points to higher fares and a focus by huge network airlines on capacity discipline to a degree we’ve never seen before. They’ve got religion when it comes to the business side. So when a deep recession, or even depression, roils these new business models, it’ll be intriguing to assess how the carriers’ newly cost-shorn, consolidated, ancillary-revenue-fed balance sheets measure up against that pressure.
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