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Turbulence in the airline industry is far from over. U.S. carriers are flying smoothly now in a pocket of profitability -- about $4 billion this year and $6.5 billion in 2008. But the good times are only temporary.
Many of the big legacy carriers are deeply in debt, a result of losses totaling $40 billion during 2002-2006. There are still too many players in the U.S. market, which means the cutthroat competition, especially the low-cost carriers, will keep prices in check.
Any economic bump will thin the ranks of the airline industry, forcing shaky carriers to consider shotgun weddings. Possible pairings: Northwest and Delta, American and Alaska, and Frontier and AirTran.
Airlines face mounting challenges in the next decade. Labor woes loom large. Unions are already planning to take a strong stand, insisting they should get back a portion of the pay and benefit concessions they made in the past few years to help keep the airlines aloft.
Air traffic congestion will worsen as the number of flights needed skyrockets to accommodate 1 billion passengers a year by 2015, up more than 25% from this year. New runways at airports serving Denver, Chicago, Miami, Salt Lake City, Tucson, Ariz., and Washington, D.C., among others, will help alleviate the pressure. But even the estimated $17.5 billion a year to be spent over the next decade won’t be enough to keep up with demand.
A new traffic control system is a must. It will take 20 years -- with outlays of $1 billion a year -- to convert to an efficient satellite-based system from the current one using ground radar. Congress has yet to figure out how to pay for it, but ultimately the tab will fall to air travelers in the form of fees.
Passengers also face an increasing number of delays. By 2015, 36% of flights are predicted to run late, compared with about 25% now. Airlines face future problems, such as crowding due to fewer vacant middle seats, reduced room for carry-on bags, additional time needed for boarding and disembarking, and modest price hikes for U.S. domestic travelers (though more global competition may dampen international ticket prices).
And competition for high-paying international travelers will worsen next year, when the Open Skies agreement with Europe takes effect. Consumers will see more choices on transatlantic routes, and foreign carriers have some big advantages. Their deep pockets will allow them to court the lucrative international traveler with premier service and up-to-date aircraft.
Amid the sector’s growing gloom, few winners will emerge: In-demand business travelers are likely to be wooed by airlines chasing this high-margin crowd. Expect a higher number of business-class-only flights. For example, Eos flies from New York City to London for less than $3500 round-trip. Accommodations include seats that turn into flat beds, multicourse gourmet meals and private entertainment stations.
Some business travelers will shun the big airlines altogether. Air taxi service and executive jet-share arrangements will boom. And very light jets (VLJs), which can weigh less than an SUV, seat up to four passengers and two crew members and cost only $1.5 million, should see a surge.
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