Airlines emerge from profit-killing oil slick

— -- In early July, U.S. airline stocks were so battered you could buy one share each of five big airlines for less than the cost of checking a single bag.

With oil prices then approaching $150 a barrel and air travel demand sinking, Wall Street's view was that most of the USA's airlines were destined for bankruptcy reorganization — some for liquidation — when their cash ran out within 18 months. One or two, the thinking went, would be toast by spring.

Now the summer season's end is approaching with an eight-day Labor Day travel period for which the airlines' trade association forecasts a sobering 6% drop in demand from a year ago. Yet conventional wisdom about airlines' survivability is changing rapidly, thanks in large measure to a $30-plus drop in the price of a barrel of oil.

Don't get too excited yet — airlines' financial health is notoriously volatile. But a combination of factors could help most, maybe even all, of the USA's big airlines dodge the bankruptcy filings and liquidations so widely predicted only a few weeks ago.

Over the last five months airlines have laid in deep capacity cuts, boosted fare prices by unprecedented amounts, and begun generating lots of new revenue by charging fees for services that used to be included with the ticket price. They've also refinanced debt, sold assets, and issued new stock to build up extra cash in hopes of surviving long enough for one or more of their competitors to fail — an event that presumably would greatly improve the surviving carriers' health overnight. Airlines, however, may not have to wait for one of their number to fail in order to get healthy financially.

Oil prices, which triggered the crisis in the first place, have fallen even faster over the last five weeks than they rose during the first half of this year. Since peaking above $147 a barrel on July 11, oil has fallen to $115. That's the fastest, most dramatic decline in history.

And though most carriers still can't turn a profit at existing jet fuel prices, they're getting close to the break-even point.

Another $10 to $15 drop in the price per barrel, which some oil experts now say is possible, will have most of them back in the black. Analysts at both Morgan Stanley and JPMorgan Chase even are suggesting that the haggard industry could be profitable in 2009.

Morgan Stanley's William Greene calls the drop in oil prices a "game-changing event" and says investors now are beginning to focus on airlines' improved liquidity and their surprising access to the capital markets.