Airlines face deep trouble, consolidation

Douglas McIntyre

Jun 8th 2009 at 7:00AM

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Just a few months ago, airlines were on the brink of recovery. Oil prices had dropped and travel was down, but people were still flying. The carriers had cut back on capacity, a move that should have made each seat more profitable.

But now the International Air Transport Association has doubled its estimates for the losses the industry will have in 2009 from its forecast of just three months ago, up to $9 billion. According to Reuters, "rising fuel prices and weak demand create an unprecedented crisis for the industry."

Tough times in the airline industry always lead to talk of mergers and bankruptcies. They are part of the heritage of the business. The Delta (DAL) merger with NWA may serve as a model of consolidation in the American airline sector. The weakest carriers could be picked off by stronger ones. The names most frequently mentioned as targets are AMR (AMR), parent of American and United (UAUA). Both have fairly weak balance sheets and high oil prices could cause their losses to balloon.

If there is more consolidation in the industry, it may save shareholders from facing Chapter 11 filings that take the value of their holdings to zero. But they will also face the mess that airline mergers create for passengers.

Douglas A. McIntyre is an editor at 24/7 Wall St.