Airlines Foresee Friendlier Skies in Year Ahead

By PAULO PRADA Losses will be no surprise when airlines begin releasing fourth-quarter earnings Wednesday, starting with AMR Corp. and UAL Corp., the parent companies of American Airlines and United Airlines. But the year ahead might prove more calm and profitable for carriers after a devastating 2008. Airlines are far better positioned to weather weaker demand today than they were just six months ago, when they faced an exponential increase in fuel prices. By grounding aircraft and reducing the number of flights, airlines are gradually matching supply to falling demand. Lower oil prices are making life easier for most. But the recession is no help. Revenues on key American routes have eroded along with the broader economy -- especially the lucrative market between the financial centers of New York and London. The industry is filling about 80% of its seats, a level comparable to a year ago, but still telling as there are fewer seats. Cheaper fuel has also created headwinds for some carriers. Consider the predicament of Southwest Airlines Co., which posts earnings Thursday. After locking in over 60% of its 2009 fuel needs at prices now on the wrong side of market rates, Southwest spent much of the last quarter annulling those contracts. Now the airline, long defined by its fuel-hedging savvy, must prove it can remain profitable without as much of a cost advantage over rivals. Southwest is the only major airline expected to post a profit in the fourth quarter. But Southwest is expected by most analysts to be joined by other carriers this year, with the entire industry posting a modest profit for all of 2009. If the economy rebounds sooner than anticipated, expect even more lift for the industry -- unless fuel prices start to rise again, too. —Geoffrey A. Fowler Email to tape@wsj.com