When Air Canada Inc. replaced its chief executive on March 30 with a veteran of the company's restructuring earlier this decade, red flags went up for those people who watch the sector.

To be sure, Canada's largest air carrier had myriad homegrown woes.

Industry experts are still pondering, however, whether, if Air Canada's struggles send the airline into bankruptcy protection once again, other flyers might follow suit.

"It could spell more bankruptcies for an industry that’s already seen more than its share of them over the years," wrote Bob O'Brien, who runs a well-followed U.S. investment blog.

How many? The answer might be fewer than you think.

"We think the airline sector will outperform all other sectors," said Vaughn Cordle, chief executive officer and chief analyst for Washington-based AirlineForecasts, a company specializing in the carrier industry. 

Air Canada's cash woes

To be clear, Air Canada is probably headed into a patch of prolonged difficulty.

The resignation of Montie Brewer as CEO, to be replaced by Calin Rovinescu, had industry watchers anticipating a new wave of cost-cutting at Canada's biggest carrier. 

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Air Canada struggles with cash issues

Rovinescu was known for swinging the corporate axe earlier in the decade as he helped restructure the airline and its affiliates the last time Air Canada slipped into bankruptcy.

Taking another run at the company's cost structure might be in order after Air Canada lost $146 million on an operating basis in the final three months of its fiscal year.

Air Canada already has a goal of saving $100 million in total expenses to add to $20 million and $40 million in cash reductions the airline has already secured from its suppliers.

Still, Air Canada's executives could still see a money crunch looming.

"While lower fuel prices and ongoing monitoring of capacity should provide some relief, the recession is expected to place significant pressure on Air Canada's passenger and cargo revenue," said the company in February when Air Canada released its fourth-quarter earnings.

The company saw its existing $400 million line of credit get yanked last fall.

That forced management to negotiate a number of smaller borrowings — including $238 million from GE Capital — to shore up the $1 billion in cash and short-term notes that Air Canada had at the end of 2008.

Other airlines follow tough flight path

Air Canada is not alone in facing financial problems.

Delta Air Lines lost $350 million US in the final three months of 2008, as the huge American carrier suffered through dropping demand and rising costs, in that case mainly driven by historically high jet fuel prices.

As well, Delta is not expecting 2009 to improve quickly.

"The worsening global economy continues to place additional pressure on the airline industry," said Richard Anderson, Delta's chief executive officer, and president Edward Bastian in a March memo to employees.

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American Airlines among U.S. carriers grappling with large financial losses ((Tony Gutierrez/Associated Press) )

Fort Worth, Texas-based AMR Corp., the parent company of American Airlines, also lost $340 million US in the fourth quarter.

Traffic for most air carriers continued to turn south for the first months of 2009.

American Airlines saw its passenger traffic tumble 11 per cent in February.

JetBlue Airways Corp., the New York-headquartered discount airline, said its revenue passenger miles — a sales measure — took an 8.3 per cent smackdown in the second month of the year.

For its part, JetBlue posted a pre-tax loss of $49 million US for its fiscal fourth quarter.

As well, Seattle-based Alaska Air Group Inc., which owns Alaska Airlines and Horizon Air, noted that its revenue passenger miles dropped by 10 per cent.

Many sector watchers view the reluctance of individuals to spend money on casual travel, the reduction of corporate travel and fewer cargo shipments as a trend that will continue.

Many industrialized economies will contract throughout much of 2009.

In addition, the International Air Transport Association forecast a drop of 5.7 per cent in the number of passengers that will fly in 2009.

Finally, the Association of Corporate Travel Executives said that 71 per cent of its members, managers who book company flights, say they will be cutting travel budgets in 2009.

Possible recovery?

A sputtering economy, however, does not necessarily equate with a lousy year for airlines, sector specialists said.

"We do expect a major rebound in airline shares this year," Cordle said.

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JetBlue among air carriers cutting flights and parking planes to save costs ((Henny Ray Abrams/Associated Press))

To some extent, a recovery in airline stocks is inevitable given the pounding that this group has taken in equity markets in the past year.

The Standard & Poor's 500 airlines index currently stands at 60.97, compared with 159 in early September 2008, a drop of 62 per cent.

AMR has seen its share price take a 65 per cent haircut, at $3.60, compared to its equity value six months earlier. Delta's stock is off 26 per cent over the past year.

In Canada, Air Canada's valuation collapsed in recent months, as its equity price now stands at 83 cents versus a 52-week high of $9.84.

Aggressive competitor WestJet Airlines has fared better with a current stock price of $12.20, still down 36 per cent versus the Calgary airlines' year-high share price.

The pounding, however, presents investors with a buying opportunity, stock watchers said.

In January, Cordle and Stifel Nicolaus & Co.'s Hunter Keay agreed that an improvement in the shares of these companies could happen if investors begin to see air stocks as cheap compared to other equity issues.

Reining in costs

What has analysts more excited — or at least not as negative — about the air sector's prospects, however, is the industry's cost-cutting of the past few months.

Many carriers have cut their capacity by parking empty airplanes, which also reduces variable costs, such as fuel consumption. The move was taken to match up how many planes are flying with the number of people who actually want to fly, experts said

"This [sector] will have a decent balance between supply and demand," Keay said in a January television interview.

Alaska Air, for example, knocked down its flying capacity by 9.4 per cent in February which allowed the company to boost its load factor — a measure of carrier efficiency — in the month despite seeing traffic drop.

American Air forecast a cut to its flight capacity of 6.5 per cent in 2009 which would be on top of a nine per cent chop to the number of available seats for the previous year.

Overall, in the first three months of 2009, there were 491,000 fewer flights worldwide, according to OAG Facts, a London-based airline data company.

Tanking fuel costs

Besides flying fewer planes, airlines will be fuelling those craft with cheaper gas.

Last year, aviation fuel spiked in sympathy with rising overall crude prices. That cost increase had a direct effect on carriers' profit line.

Alaskan Air, for example, estimated that each $1 US increase in jet gasoline prices translated into $9 million less in pre-tax earnings.

Now, however, as world oil prices have slid below $50 a barrel in 2009, the costs of getting a jet off the ground have fallen proportionately.

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Dropping crude oil prices have cut aviation fuel

Glenn Johnson, Alaska Air's chief financial officer, told an industry conference in March that his airline was spending $100 for a gallon of aviation fuel last year.

"Now, we're spending $45," he told analysts in New York.

Less fuel equals more money for an airline's bottom line.

In January, Cordle estimated that Delta's jet fuel costs will total $7.5 billion, down almost 40 per cent from the $12 billion the company paid in 2008.

Similarly, American Air will pay $5.1 billion in 2009 versus $9.1 billion in fuel costs one year earlier.

Regardless of those positive signals, however, investors might be excused if they remain wary of airlines.

IATA also forecasts that carriers worldwide will lose $4.7 billion in 2009 with revenue falling $467 billion. That red ink is on top of the likely loss of $8 billion in 2008.