Airline industry to shrink by 20%

From Airline industry not designed for $130 oil
Dallas Morning News
08:30 AM CDT on Friday, May 23, 2008

By TERRY MAXON / The Dallas Morning News
tmaxon@dallasnews.com

via John Robb's Weblog

"The current business model is not sustainable at oil price levels above $130 a barrel," he told clients in a report Thursday. "Cost-cutting, ticket price increases and additional ancillary revenues can't match the unprecedented rise in oil prices."

Mr. Neidl said that airlines must undergo "major capacity shrinkage" to force up fares, "or oil prices have to decline substantially, down towards $100 a barrel, for the industry to return to even break-even levels."

How much? Mr. Neidl estimates that U.S. airlines need to cut domestic capacity – flying in the United States and Canada – by at least 20 percent. To put it into context, that would be equal to the entire capacity of Continental Airlines, US Airways and Frontier Airlines.

"This is a significant reduction that would come from airline merger-related capacity cuts, liquidation of weaker carriers or the industry showing strong discipline in implementing capacity cuts across the board," Mr. Neidl said.

The only major merger currently pending is that of Delta Air Lines and Northwest Airlines, proposed in mid-April by the two carriers. United Airlines and US Airways are reportedly talking about merging as well.

However, Delta and Northwest are talking about largely keeping their current systems, with little capacity reduction.

Another analyst, Michael Linenberg of Merrill Lynch, suggested that capacity reductions that go too far can increase losses in the short term, endanger needed cash flow and mess up an airline's connecting network.

This week, American said it would cut service by 11 to 12 percent, ground 75 airplanes and lay off thousands of workers. And Mr. Arpey told reporters that more cuts would be necessary if fuel prices keep rising.

On Monday, Mr. Arpey prepared his speech to shareholders, referring to $125 oil. By Wednesday's speech, prices were at $130. Later the same day, prices hit $133.

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And we're considering expanding PDX why, exactly?