Still a bumpy ride

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Seven of America’s biggest airlines chalked up combined losses of $5.9 billion in the second quarter of the year, but last week their share prices continued their month-long, gravity-defying rebound. Fuelling the new optimism was a report from Morgan Stanley, an investment bank, suggesting that much of the troubled industry could return to profit as early as 2009. Could the tempest of rising costs and sagging demand that so recently seemed to jeopardise many airlines’ survival already be blowing itself out?

The cause of the change in sentiment is hardly a mystery. When crude-oil futures nearly touched $150 a barrel in mid-July, the airlines were braced for the gravest crisis in their history-something far worse than the aftermath of September 11th 2001. But since then oil futures have fallen steadily, hitting $112.31 on August 12th. The United States Airlines Index has become almost a mirror image of the price of jet fuel, climbing 13% this month while the price of fuel fell by 12%.

William Greene of Morgan Stanley describes the drop in fuel costs, if it lasts, as “a game-changing event for the industry” that would give the airlines “substantial breathing room”, even if demand weakens. He argues that lower fuel prices, combined with the measures the airlines are taking to cut capacity (by grounding older planes) and raise revenue (by charging for services that used to be free), may be enough to return Delta, Northwest, Continental and United to profit next year.

But other observers think it is too early to celebrate just yet. Giovanni Bisignani, the director-general of IATA, the trade body that represents the interests of many of the world’s airlines, warns that despite all the talk of reducing capacity, it is still growing faster than demand. IATA’s figures for June show global capacity rising by 5.5%, whereas passenger growth hit a five-year low of 3.8%. Even in North America, capacity grew faster than traffic.