U.S. Airlines Emerging from Recession

With the global economy continuing to improve, there is steady
improvement in demand for air travel as well as cargo since the beginning of
2010, after being badly affected by the economic downturn. Business travel,
which is directly affected by the economic environment, plunged to an all-time
low in 2009 as many corporations slashed travel budgets. Leisure travel as well
as cargo also showed a remarkable decline.


Airline capacity is expected to improve in 2010. This would help
to keep fares in check, besides making it easier for travelers to book
last-minute seats. With improving economic sentiment, business travel and
demand for air cargo are gradually catching up.

The economy is still far from healthy though, with unemployment
likely to remain high throughout the year. Growth in consumer spending is also
expected to be sub-par as compared with the prior years. However, we expect
faster growth in the next four years as the economy gathers momentum, consumers
and business sentiments recover and spending increases.

In a severely fragmented industry, consolidation is the writing
on the wall, as the recent merger announcement between United Airlines and Continental
Airlines shows. The 2009 recession and a drop in travel demand has been
difficult for almost all air carriers, with small companies finding it hard to
subsist, thus making consolidation imperative. This is the optimal way for the
industry to deliver sustainable profitability, by gaining better efficiency,
greater economies of scale and reduced operating costs.

On the consolidation front, a major development in 2008 was the
merger between Delta and Northwest Airlines, which made Delta the world’s largest
airline. The merger provided significant cost advantages for the operation of
both airlines. Further mergers and acquisitions appear likely, provided that
some operators would inevitably find it harder to recover than others. Low-cost
airlines, which have weathered the storm in 2009, stand in a more favorable
position now, and may even end up purchasing some regional operators.

Though almost all carriers are expected to benefit from
the improving economy, the airline positioned to show the the most improvement
may be United Airlines, a wholly owned subsidiary of UAL Corp. The
company has been reporting improving revenues, with its Corporate segment
recording an increased demand from international markets. Pricing trends have
also shown an improvement. UAL’s recently announced merger with Continental
Airlines will make it the biggest airlines with an enhanced capacity and
improved service.

Delta is uniquely positioned to benefit from its merger with
Northwest Airlines, which has made it the world’s largest airline generating
economies of scale. Moreover, Delta has recently seen a surge in business
travel volumes and improved pricing, a trend which is expected to continue.