Falling oil prices have given some relief to the US airline industry, but demand is sluggish partly because of toughened security measures.

Advance bookings are dropping at major carriers such as Continental Airlines, where unit revenues have also dipped, and even low-fares leaders such as AirTran Airways are trimming expansion plans. A series of fare increases that had succeeded unabated suddenly faltered in August when United Airlines pulled back a proposed hike as consumers resisted, and boardings have started to slow.

Airline analysts, while not alarmed, are beginning to worry that the benefits of falling oil costs – down by about 18% since mid-August – will not translate into revenue or profits. JP Morgan’s Jamie Baker, whose optimism had led him to downplay earlier speculation of an industry slowdown, said in September it is “becoming increasingly apparent” the industry is experiencing demand weakness “primarily due to heightened security measures and resulting sluggish start to the business travel season”.

At JetBlue, lethargic revenue growth and margin pressure led one ratings agency, Fitch, to downgrade debt in mid-September. While JetBlue has been slowing its capacity growth for months, three of the industry’s fastest growing carriers have more recently begun to reverse course.

AirTran will pull back on growth this fall after “seeing softening in demand” in late August. Raymond James analyst Jim Parker says the slowdown has hit short-haul travel hard, making AirTran vulnerable and forcing the carrier to try to sub-lease some of its Boeing 737s.

At Southwest, management has told analysts security concerns are dragging down revenue, which is likely to show a 10% increase for the rest of the year, short of the 13.4% growth levels that Cathay Financial’s Susan Donofrio had forecast.

Continental, a bellwether because it reveals its revenue trends earlier and in more detail than others and because it has added capacity more aggressively than other legacy carriers, in mid-September downgraded its third-quarter revenue outlook from “strong” to “modest”, citing lower domestic and transatlantic trends. It trimmed its mainline growth plans from 7% to 5.3% for the December quarter, which Merrill Lynch analyst Mike Linenberg says reflects “the hassle factor, whether perceived or real, associated with security concerns but also reflects declining GDP growth”.

Capacity is becoming the key issue: will airlines continue the capacity restraint they have shown so far this year or will they pour it on, encouraging drastic fare slashing to fill aircraft? While JP Morgan’s Baker is optimistic, others such as analyst Stuart Klaskin of KKC Aviation Consulting in Coral Gables, Florida, note that the industry’s historic habit of adding too many seats is a hard one to break.

Meanwhile, the Transportation Department’s Bureau of Transportation Statistics reported in mid September that passenger enplanements in the first six months of this year climbed an anaemic 0.9% from the same period of 2005, and rose just 0.1% in June, year on year. By contrast, boardings had risen 7.3% in the first half of 2005 from 2004’s first half. ■

Source: Airline Business