Airline group: Credit squeeze could delay passenger improvements

A financial review of the U.S. airline industry by the Air Transport Association, its leading trade group, concludes that although carriers are once again profitable, they may not be profitable enough to borrow the money needed to improve their fleets and their customer service as much as they should to stay competitive in an increasingly global marketplace. ATA chief economist John Heimlich said that the industry is expected to post an overall net profit for 2007, putting U.S. airlines in the black for two consecutive years – the first time that’s happened since 1999-2000. However, in the interim, the industry posted a collective loss of $35 billion.

Heimlich noted that since deregulation in 1978, the airline industry “has never posted a profit margin higher than that of the average U.S. corporation,” a pattern he said is “unlikely to change any time soon, rendering it difficult for the airlines to borrow money at reasonable rates to invest in the future.” Only one of the top 10 U.S. airlines currently enjoys an investment-grade credit rating from S&P, he added, so “renewing fleets, upgrading facilities, improving customer experience, enhancing fuel efficiency and making other prudent business investments all remain difficult, at best, at a time when the need for those investments is clear.”

Continuing growth in passenger demand should help offset spiraling fuel costs in 2008, he said, allowing the U.S. airlines to post a third consecutive profitable year. Airlines have already moved to trim unprofitable routes and redeploy their fleets to more promising markets, and in 2008 they are expected to focus on gaining “higher yields by increasing business travel as a share of total traffic,” he said. Perhaps the most obvious shift by the major airlines has been to cut back domestic capacity while increasing their presence in more profitable international markets. The easing of route restrictions between the U.S. and Europe, China and India will give carriers more opportunity to pursue this strategy, Heimlich said, but they must be able to offer the kind of service that will let them “compete head to head on that stage with powerful international competitors.”