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U.S. airlines in precarious sweet spot

CHICAGO (Reuters) - The airline industry, long the problem child of corporate America, finds itself in a precarious sweet spot these days.

An American Airlines aircraft takes off from Heathrow Airport in London February 2, 2009. REUTERS/Andrew Parsons

While the economic recession is sinking industries with better track records, U.S. airlines are at least managing to tread water.

It’s a welcome irony for carriers whose enormous and concerted downsizing in response to record high fuel prices last year ended up helping them cope with plummeting ticket sales later.

“That was only serendipity that the capacity cuts came at the same time that traffic started to drop,” said independent consultant Michael Boyd. “They didn’t see the demand drop any more than anybody else. They were just planning on flying fewer airplanes and fewer seats because of oil prices.”

Major carriers like Delta Air Lines DAL.N, AMR Corp's AMR.N American Airlines and UAL Corp's UAUA.O United Airlines slashed capacity last year to offset fuel bills that raced to record highs in July alongside crude oil. When oil prices dropped 75 percent in the second half of 2008, airlines reaped the big benefits.

But without the shock of costly fuel -- often the biggest expense for airlines -- the companies might not have undertaken the downsizing that would be their salvation a few months later, when the recession laid waste to industries across the business spectrum.

Last July, a week after crude oil hit a record high, the Amex airline index .XAL notched what was then an all-time low. Since then, the index has gained 8 percent, compared with a 40 percent decline for the broad S&P 500 .SPX.

“The airline industry is better postured to get through this mess than a lot of other industries are,” Boyd said. “(Airlines) look a little luckier.”

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RELATIVE STRENGTH

Although travel demand is down and forecasts are bleak, once-struggling airlines are where some hard-hit industries hope to be after restructuring.

In the U.S. retail industry, for example, top companies have closed stores, curbed openings and cut jobs by the thousands. The crisis has claimed Linens 'n Things, which eventually liquidated after filing for Chapter 11 last year, and Circuit City Stores CCTYQ.PK, whose remaining stores closed for good this month.

The technology sector also has been clobbered by weak demand during the global financial crisis. As businesses cut back on IT purchases and consumer spending dried up, companies like Microsoft MSFT.O and hard disk drive maker Seagate STX.O have unveiled downsizing efforts.

Meanwhile, automakers General Motors Corp GM.N and Chrysler LLC CBS.UL, once mainstays of the U.S. economy, are vying for bailouts and struggling to survive.

Major airlines insist they have no intention of asking for similar assistance. But they have received it before. After the hijack attacks on New York and Washington in 2001, the U.S. government approved $15 billion in direct aid and loan guarantees mainly to help carriers recover.

U.S. carriers even look good within the global airline industry. A rebound in the U.S. dollar in the second half of 2008 gave them a fuel-price advantage over foreign rivals whose local currencies declined, thereby boosting energy costs.

SHAKY GROUND

Stability is not the norm for U.S. airlines, which in the last decade has weathered a low-cost revolution, 9/11, terror concerns, and passenger fears of SARS and bird flu. This painful era also saw multiple bankruptcies and the purchases of Trans World Airlines, Northwest Airlines and the former US Airways by rivals.

“The industry is so dynamic it could change on a dime,” said Morningstar analyst Basili Alukos, citing the weak outlook for travel demand that still faces the business.

Airlines are constantly trying match capacity with demand, but recent data show they may not be acting quickly enough.

Monthly reports on airline operations released last week showed sharp declines in traffic as carriers slashed capacity. More troubling, however, were the shrinking load factors, which measure how full a plane is.

On Tuesday, Delta responded once again to the crisis, announcing plans to cut international capacity by an additional 10 percent starting in September. Other airlines say they can downsize again if needed.

“Today, the airlines are under pressure because of the falling demand environment,” Alukos said. He predicted airline stocks would not continue outperforming the overall market.

“Unless airlines incessantly slash fares -- they have already started -- I don’t see a turnaround in demand any time soon,” he said.

For now, airlines seem to be holding their own. Analysts even broadly expect them to post profits this year. But it’s a strange time for the business, which doesn’t usually stack up so well against other industries, said independent airline consultant Robert Mann.

“It may never occur again,” he said. “Enjoy it while it lasts.”

Editing by Lisa Von Ahn

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