Airlines caught between oil, economy: US Airways

By Rachelle Younglai

WASHINGTON (Reuters) - U.S. airlines are caught between the competing influences of cheaper jet fuel and flagging travel demand, the chief executive of US Airways Group (LCC.N) said on Tuesday.

For now, plummeting oil prices are winning the tug-of-war, and airlines expect improved fortunes in 2009, Doug Parker told Reuters in an interview. But it is too soon to celebrate, he said, warning that the full impact of economic weakness on travel bookings has yet to be seen.

"Clearly, the economy will have some effect on demand for airline travel. The other economic impact has been the substantial decline in fuel prices," Parker said. "In some sense, those two offset each other. It's hard to tell at this point if the drop in fuel is enough to offset what we may see in demand declines."

"If, somehow, those two things delink, the economy and oil prices ... that's a bad formula for airlines," he said.

The industry has been battered severely this year, first by soaring fuel costs and later by economic weakness that threatens to erode travel demand.

In the first half of the year, US Airways and its top rivals announced plans to slash capacity to combat crippling fuel bills, which rose with the price of oil. Crude oil prices peaked in July and since have fallen by more than 60 percent.

"Oil prices are much lower than the third quarter, so fourth-quarter results I think in general for the industry are going to be better than the third quarter," Parker said.

Meanwhile, carriers proceeded with capacity cuts that gave them pricing power even as travel demand diminished. Parker said US Airways has no intention of losing its capacity discipline.

Despite the benefits of falling fuel costs, the decline has been a mixed blessing: Airlines also saw their fuel hedge portfolios lose value. Top airlines wrote down almost $2 billion in the third quarter in noncash mark-to-market losses. US Airways wrote down $488 million.

Parker said volatile fuel prices are forcing US Airways to rethink its hedging strategies. He said the carrier has done no hedging in the last couple of months.

Parker, who engineered the 2005 merger of US Airways and America West Airlines, remains a proponent of industry consolidation. He said the business is too fragmented but declined to predict when another merger might occur.

US Airways' bid for Delta Air Lines (DAL.N) was rebuffed last year, but Delta later bought Northwest Airlines to form the world's largest airline.

"It's very hard to predict indeed when those kind of things happen. Planets have to align," Parker said.

(Writing by Kyle Peterson; editing by John Wallace)