The key to the future success of the legacy carriers is whether they can morph into something resembling the low-cost carriers.

These are clearly not good times for the US airline industry. Over 50% of the capacity of the industry is in bankruptcy. The two major carriers not in bankruptcy (American and Continental) are not in good shape either and if fuel problems continue, they could be in danger. In addition, they must compete with the bankrupt carriers who now have advantages with respect to costs they don’t have to honor, including significant pension costs. The non-bankrupt carriers could consider bankruptcy for strategic purposes to level the playing field with their bankrupt competitors. Many smaller carriers are also in bankruptcy (e.g., ATAAmerican Trans Air, Mesaba, etc.) or are teetering (e.g., Independence, Spirit). Jet Blue’s credit rating was recently downgraded because of an earnings fall due to high fuel prices.

While demand has been buoyant, recent inflationary scares due to high fuel prices and pressures on certain materials due to the rebuilding costs associated with Hurricanes Katrina and Rita could have a short-term impact on the industry. Core inflation is under control but since fuel costs are at a high and inelastic part of budgets (the journey to work must go on and the house must be heated), consumers will have less discretionary income, and much of air travel is discretionary. So there’s a short-term storm that must be weathered before we get to the long-term.

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