How Is the Economic Downturn Affecting the Airline Industry?

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EXECUTIVE SUMMARY

Stagflation in US economy threatens outlook for the airline industry profitability. US airlines forecasting Q108 losses citing high fuel costs and a potential economic slowdown.

Other regions of the world will expand such as Asia, Middle East and Latin America.

Slowdown has already affected some US small-mid cap carriers with the recent onslaught of bankruptcies.

US majors are better armed to combating the effects of the sharp increase in jet fuel. Cost reduction initiatives have been announced.

Slowdown in the US economy is expected to accelerate consolidation talks between the majors.

Cash cushions at most US majors from a profitable 2007 will help them in the short-term. Financial impact of slowdown could be delayed to 2009.

FAA investigations into major US airlines maintenance practices regarding AD’s were heightened as a result of the increased scrutiny following lapses of compliance.

ANALYSIS

Stagflation in US economy threatens outlook for the airline industry profitability. US airlines forecasting Q108 losses citing high fuel costs and a potential economic slowdown.

Downturn in Economy
Profitability for the airline industry adjusted to $4.5B US airlines are most exposed to the risks in the business environment. US airlines forecast cut to $1.8B net profit in 2008.
This could turn into a net loss if the economic environment deteriorates further. ­If central banks fail to reverse the credit crunch, the outlook could be worse. ­US consumer confidence slumped in March to levels consistent with a serious recession

Increase in Jet Fuel Prices
Record high numbers of $130+/barrel.
Airlines like Delta only hedged at $90/barrel
The offset to rising prices during 2004-2007 provided by rising US consumer confidence and travel demand has come to an abrupt end in 2008.

Other regions of the world will expand such as Asia, Middle East and Latin America. Competition...
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