Airlines have a glimmer of hope in 2006

They wont exactly be soaring. But U.S. airlines should be able to reduce their cumulative losses in 2006 to $1 billion to $2 billion and possibly post a cumulative profit in 2007, the chief economist for the industrys trade association forecasted.

While we are far from being out of the woods, we are poised to turn the corner, John Heimlich, vice president and chief economist for the Air Transport Association, said in the annual forecast he released Jan. 12.

Heimlichs optimism -- at least what passes for optimism in the U.S. airline industry these days -- is based on several factors.

Those include cost-cutting: Traditional network carriers have simplified and shrunk their mainline fleets, which are now 20% smaller than in mid-2001, Heimlich said.

Airlines have also eliminated more than 160,000 jobs since then and, with changes in work rules, theyve seen labor productivity surge by 30%.

Theyve also improved fuel efficiency by 18% since 2000, although thats been masked by the rise in fuel costs.

Heimlichs optimism also is based on forecasts that fuel prices will be slightly lower this year and that fares will continue to rise. Financial analysts are predicting a 5% to 6% increase in passenger revenue this year. If fares rise and fuel prices fall, he said, the airlines might be able to reduce their break-even load factor to 80% or even a bit lower this year.

The break-even figure has been higher than 81% for four of the past five years.

However, the airlines cannot realistically expect to fill that high a percentage of their seats.

The course of fuel prices has been difficult to predict, which puts a big question mark on any forecast. But, even if Heimlichs forecast proves accurate, the industry still will be struggling.

To put this in some perspective, even with U.S. airlines pushing through a bunch of fare hikes this year, ATA figures show that domestic fares through the first 11 months of 2005 averaged 19% below 2000 levels, Heimlich said.

Also, years of heavy losses have left U.S. airlines carrying more than $100 billion in debt, which is about $30 billion more than five years ago, he added.

It will take several years of profits to dig our way out of this hole, Heimlich said.

One consequence is that Heimlich foresees more industry consolidation, including at least one major merger proposal in 2006.

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