British Airways fires 3,000 as airline industry turns ugly

British Airways lost $485 million for the six months that ended in September. The airline's CEO Willie Walsh told the BBC that this has been the "most difficult year in the history of British Airways". BA is planning to cut 3,000 more workers in an attempt to return to profitability, but the firm's outlook for an improvement in passenger traffic is bleak.

The BA news should not be seen in isolation. After a brief period in which analysts and traders hoped for a full-scale turnaround in the global airlines industry, those sentiments have faded. The dismay is reflected in the stock prices of US-based airlines. Shares of American (AMR) are down about 25 percent in the last month, and most stocks in the sector are off more than 10 percent.

The theory that airline earnings would get better was based on three premises, which have turned out to be largely untrue. The first is that fuel costs would continue to fall, or at least stabilize. The price of crude has risen to $80 and there are concerns that a step-up in the world's economic growth will take oil even higher, bringing jet fuel costs with it.

Airlines have benefited from costs cuts, and that may continue, particularly if other large airlines follow BA's example and cut more jobs. But carriers will eventually face the "car industry problem," which is that there are only so many people who can be cut before firms starts to lose viability, and become unable to perform when business returns.

The last and most critical factor affecting airline earnings improvement is that many believed that the economic recovery would bring travelers out in droves. However, unemployment and a new frugality on the part of business have made it more difficult for airlines to draw passengers back, and that could be the case for another several quarters -- if the economy continues to recover.

The notion that the business prospect of airlines is getting better is merely a notion.

Douglas A. McIntyre in an editor at 24/7 Wall St.

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