For Airlines, Fall Is the Problem

The big airline-traffic declines haven’t started yet, despite the flood of bad news in the industry. In fact, some airlines this week reported a rise in June passenger traffic from a year ago, especially on international routes, as travelers made good on their summer vacation plans.

Early reports from U.S. airlines indicate that June passenger traffic for domestic flights was about the same as a year ago, with airlines posting gains on most international routes. Southwest Airlines Co., the biggest carrier of domestic passengers, said traffic edged up 0.7% in June, on a 5.7% increase in seat capacity. At Continental Airlines Inc. traffic rose just 0.1%, with domestic passenger traffic down about 4% from last year. International flying was up 2.5%, led by a 6.5% gain in transatlantic passenger traffic.

Encouraging news? Not really. The deep cuts in carriers schedules won’t come until after Labor Day, when most carriers are planning sharp cuts in their schedules, as they cope with the high cost of fuel and an expected fall-off in passenger demand amid the weak U.S. economy.

The International Air Transport Association said Wednesday that, according to its most recent data, global air traffic was up 6% in May, more than expected. The pace slowed from the 7.4% growth recorded in May of 2007. (Air traffic generally tracks the economy, and has been growing globally at about 5% per year.) Strong growth this year, despite economic worries, came mainly because U.S. airlines have been adding seat capacity on international routes, where flying is more profitable. Still, said IATA Chief Executive Giovanni Bisignani, with jet fuel prices up 87% from a year ago, airlines are facing operating costs that have risen by 20% to 30%. “Efficiency everywhere is imperative,” he said.

So far, U.S. carriers have announced cuts in unprofitable flights that add up to a reduction of about 5% of industry flying by the fourth quarter of this year. When fall flight schedules are finalized, 10% or more of flying will be eliminated. Analysts have said the industry needs to shrink by 20% to remain profitable over time.

“It isn’t the summer we’re worried about,” Jamie Baker at J.P. Morgan wrote in a research note. “We continue to expect material [passenger demand] slippage this fall, accompanied by increasingly aggressive capital-raising efforts from virtually all airlines.” –Ann Keeton