How have US airlines been surviving?

A court on Wednesday will consider a request by troubled carrier United Airlines for an injunction against its staff, preventing them from misusing sick leave to disrupt flight operations. The industrial action has been triggered by the airline’s plan to cut 7,000 jobs and ground 100 aircraft, in the face of high fuel costs. The airline lost 3.3 billion dollars in the past three quarters, wiping out the weak gains of 2007.

The cuts form part of an effort by carriers such as United to stamp down on costs wherever possible (for instance, cutting meals for economy class passengers on international flights) and to pursue aggressively new sources of revenue (including on-board wireless internet), under a trend by which older carriers adopt the penny-pinching habits of their low-cost peers. However, while such measures will help at the margins, more drastic action will be needed to restore profitability -- namely mergers, in an industry where obvious economies of scale exist.

This may allow ‘legacy’ carriers to deal with their long-term problems, including high levels of debt and an increasingly antiquated fleet (whose older, thirstier engines are a particular liability given present oil prices). One report from Morgan Stanley suggests that given the rationalised market, and so long as oil does not spike again, airlines might return to profitability by next year.

However, mergers will require regulatory clearance and -- crucially -- union approval. To deal with the former, airlines are angling for special treatment: formal foreign takeovers of US carriers are prohibited by law, but informal 'alliances' are possible with a nod from the regulators. American, British Airways and Iberia applied on August 14 for immunity from anti-trust regulations in order to better co-ordinate their transatlantic operations. There is no such obvious quick fix for the second issue. Labour concerns have delayed a link-up between Delta and Northwest, for instance, and such problems call into question the wisdom of United’s aggressive approach to its unions in the courts.

Moreover, time to effect a merger is running out, as a recession begins to bite into demand for flights (by business especially). The Official Airline Guide, a trade publication, predicts that demand will fall by 7% in the last quarter of the year -– exceeding even the slowdown that followed the terrorist attacks of September 2001. To make matters worse, many advantageous fuel prices hedges will expire at the end of the year, causing a significant increase in airlines’ fuel bills. In such an environment, airlines such as United may cease to be attractive merger partners altogether, and without that lifeline will face the prospect of failure outright.