Airlines could suffer with fewer fliers, Wall Street meltdown

— -- Amid higher airfares and a crisis in the financial markets, airlines in the U.S. and abroad are seeing or bracing for softening passenger demand.

The International Air Transport Association, which represents 230 carriers worldwide, on Thursday said international travel fell in July, especially in the lucrative first class and business class.

The number of passengers traveling on premium tickets fell 1% in July after growing the first six months of 2008.

Though average jet fuel prices in recent days have dropped about 20% from their July peak, "The financial sector meltdown now risks a much sharper economic downturn," IATA said.

Prompted by record fuel prices this year, airlines have been hastily parking old, inefficient jets, dropping flights, raising fares and fees and cutting jobs to reduce costs and force up ticket prices. By December, the U.S. industry's domestic flying capacity will be down 10% year-over-year.

Last week, Alaska Airlines became the latest major U.S. carrier to announce big flight cuts for coming months.

"We think there's a high probability that we will continue to see demand for travel falling," said Andrew Harrison, Alaska Airlines' managing director for planning. "This economy is going to be around for a while."

Alaska earlier had pulled its fall schedule down about 6%. But Friday it said it will cut its winter flying capacity even more, a total of 8% systemwide, even more on its routes to Mexico and Canada.

Meanwhile, at a conference Thursday of U.S. airline executives sponsored by Calyon Securities in New York, several expressed uneasiness.

"Questions about the … price of fuel and the direction of the economy are still unanswered," said American Airlines Vice President Beverly Goulet. She said the industry's in "turbulent times."

Even falling oil prices are turning out to be not completely good news. United Airlines said Wednesday it could take a hit of more than $500 million in this quarter because the rapid fall in oil prices means losses on some of the fuel hedges it put in place to protect it from sharp price increases.

The dramatic steps taken by the airlines seem to be having some success. Delta Air Lines said Thursday it expects its revenue per seat for every mile flown to jump by double-digit percentages in both its domestic and international flying in the fourth quarter compared with the same period last year.

However, Delta also reported "some softening of close-in business demand" — tickets bought by business travelers planning to fly within 30 days.

The Air Transport Association, which represents U.S. airlines, is forecasting the U.S. industry will lose as much as $8 billion this year, about as much as it lost in 2003 but not as much as in 2001.

In an interview, ATA chief economist John Heimlich did not rule out more flight reductions than airlines have already announced — which would make finding affordable flights even harder.

"We have a long way to go" to become profitable again, Heimlich said.