Analysts: 2006 Pivotal Year for Airlines

The U.S. airline industry is coming off an up-and-down year that saw two major carriers file for bankruptcy but others begin to pull out of a nosedive that began in 2001. Losses at the biggest U.S. airlines since the economic downturn in 2001 were expected to approach $30 billion. Still, 2005 was nearly a good year.

Some companies, including the parent of American Airlines, the largest U.S. carrier, could have turned a profit if fuel prices hadn't shot so high. Some airlines narrowed their losses by sharply cutting costs other than fuel, including wringing wage concessions out of their workers.

Some analysts think 2006 will be a pivotal year. Michael Linenberg of Merrill Lynch says fewer planes flying, rising fares and lower fuel prices could lift the stock of airlines. He calls it a reversal of the perfect storm - costly fuel, growth of low-cost carriers, and too many seats on sale - that swamped the carriers in red ink.

The new year started off with news of some of that extra capacity disappearing: FLYi Inc., the bankrupt parent of Independence Air, said it would shut down its operations on Thursday evening.

The low-cost airline competed against discount carriers JetBlue Airways Corp., AirTran Holdings Inc. and UAL Corp.'s Ted from its Dulles, Va., hub. It also competed with Southwest Airlines Co., which flies out of Baltimore-Washington International Thurgood Marshall Airport.

Dallas-based Southwest Airlines has been the only carrier to be consistently profitable in the current slump. Chief Executive Gary C. Kelly agreed that trends are looking up.

"The economy is continuing to grow at a healthy rate, business travel is continuing to pick up, and industry capacity (measured in seats times miles flown) has moderated and even shrunk in some areas," Kelly said. "If all those underlying conditions continue, we ought to have robust revenue production for the industry next year."

Southwest's goal is to boost profit 15 percent in 2006. Analysts think it will do even better - a 25 percent increase in earnings per share, according to a survey by Thomson Financial.

Analysts predict five other carriers also will earn a profit in 2006: American's parent, Fort Worth-based AMR Corp.; Houston-based Continental Airlines Inc.; Alaska Air Group Inc.; JetBlue; and AirTran. Of the five, only Alaska Air was expected to be profitable for 2005.

Analysts expect nine of the 10 largest U.S. carriers to increase their revenue next year - only bankrupt Northwest Airlines Corp. is expected to see sales decline.

Southwest's Kelly said the wild card will be fuel. Southwest insulated itself from high prices by hedging. Over the past several years, it took options to buy fuel at set prices, a gamble that looked brilliant after prices surged beginning in 2004. Other carriers, such as American Airlines, either didn't or couldn't afford to hedge.

Executive Vice President Daniel P. Garton said American was pleased with its ability to control other costs and to increase sales. American is also searching for other ways to make money, including doing maintenance for other airlines at its facility in Tulsa, Okla.

"We're not where we need to be, but we end the year with a little bit of a cash cushion and with positive momentum," Garton said.

Continental officials did not respond to a request for an interview, but in comments to investors last month, Chief Financial Officer Jeffrey J. Misner said the carrier believes it has costs under control.

Continental has cut nonlabor costs about $1 billion a year and another $418 million in labor costs, and flight attendants will vote on $72 million more in annual concessions this month.

Delta Air Lines Inc. and Northwest filed for bankruptcy in September, joining UAL Corp., the parent of United Airlines, which has been operating under bankruptcy protection since 2002.

With so many airlines in financial troubles, some analysts believe the industry is poised for consolidation.

Last fall, America West bought US Airways and formed US Airways Group Inc. There has been speculation that Continental could make a move for United in the new year.

Continental's Misner said the airline would be "very happy to go it alone" but that the two carriers would make "a knock-'em-dead worldwide network."

Southwest is the strongest carrier financially but professes no interest in an acquisition. Instead, Southwest added service to Pittsburgh in 2005 and will return to Denver in January after pulling out many years ago. It is also expanding flights elsewhere and plans to add nearly 30 jets next year.


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