Airlines hurting for passengers, revenue

Passenger revenue fell 26 percent on U.S. airlines in June compared to a year earlier, the eighth consecutive month of declines, an industry trade group said today.

Separately, J.P. Morgan Chase said in a client note that US Airways Group and United Airlines are the most vulnerable for failure with credit markets tight for borrowing cash.

"We believe there's a reasonable possibility that US Airways and/or United may be forced into Chapter 11, or some sort of prepackaged shotgun marriage with each other," said J.P. Morgan analyst Jamie Baker.

"One thing is certain in our minds: the size and shape of the industry may radically change over 6-12 months, with leaner winter months witnessing the greatest potential upheaval," Baker wrote.

The Air Transport Association of America said, after the stock markets closed, that the number of passengers traveling on U.S. airlines in June fell 6.5 percent, while the average price to fly one mile - called passenger unit revenue - fell 20.7 percent compared to June 2008.

Airlines saw air freight shipments drop 20 percent in May from the same month last year, the 10th consecutive month of declining cargo traffic. June cargo traffic is not yet available.

"The airline industry remains fragile in this country," said Air Transport president and chief executive James C. May.

"Unless this industry can consolidate, get smaller and charge higher fares, it is not sustainable in its current form," said William S. Swelbar, research engineer at MIT's International Center for Air Transportation. "At some point, there has to be revenue traction. There are going to be some carriers that can't make it through this."

However, bankruptcy or liquidation is not a certainty, J.P. Morgan's Baker said in a note.

"Airlines may be bad at making money, but their track record for finding it stands in sharp contrast. Investment banks, leasing companies, manufacturers and the U.S. government often meddle with market forces."

Baker predicted the Obama Administration may eventually "interfere, up to and including endorsing consolidation" among weaker airlines. "Washington may ultimately prove the lender of last resort and push for job-saving consolidation in return."

"Unfortunately, this does less to reshape the industry than outright liquidation," but could provide capacity relief and allow for profits," he said. "We continue to find merit in a potential US Airways-United combination."

Airlines are scheduled to report second-quarter financial results this week, starting with Continental Airlines, Southwest Airlines Co. and United tomorrow.

Contact staff writer Linda Loyd at 215-854-2831 or lloyd@phillynews.com.