Although 2008 and 2009 were among the worst years for U.S. airlines, 2010 is shap­ing up to be among the best. According to our airline industry overview, the 2008 oil price spike, which led to untenable fuel prices for airlines, was followed by a steep economic recession. The result was a dramatic decline in corporate demand for travel and, for airlines, those precious premium customers. Passenger enplanements fell 5% in 20091 while rev­enue declined 17% as carriers slashed fares in response to the sharp falloff in demand.

The industry’s response to the challenges was both aggressive and swift, paving the way for a very profitable 2010. Airlines’ significant capac­ity reductions over 2008-2009 provided more supply-side leverage in the demand-supply equation. They have also ramped up ancillary services and unbundling of their product, mak­ing dramatic contributions to airlines’ top and bottom lines.

Airline Industry Overview

Fare increases are driving an improved revenue picture for 2010. Airline passenger revenues are recovering, up 14% through 1H10. By compar­ison, traffic is relatively flat. Passenger enplane­ments at low-cost carriers (LCCs) were up just 2.5% through 1H10, while traffic actually declined slightly amid the six major network carriers. LCCs are experiencing marginally higher revenue and traffic growth.

Amid one of the most volatile periods in the history of travel, there have been fundamental shifts in the structure of the U.S. marketplace. While 2008 forced several airlines out of busi­ness, 2009 witnessed the formation of the world’s largest airline with the merger of Delta and Northwest, whose record-breaking marriage will not be eclipsed by that of Continental and United. The acquisition of AirTran, the largest U.S. LCC, by Southwest will give AirTran a much larger presence on the East Coast. The airline industry overview states that while OTAs have proved to be powerful distribution channels during the recession, the combination of fewer, larger carriers and an economic recov­ery (albeit modest) could swing leverage in the distribution chain back toward suppliers.

Online airline sales declined 7% in 2009 as a result of falling demand. While this turnaround was striking for a segment that has experienced consistent year-over-year double-digit growth, the decline is still signifi­cantly better than that of the total (online and offline) airline market (-17%). The single-digit decline in sales demonstrates the countercy­clical potency of the Internet amid a recession, our airline industry overview research shows. Total online air sales were $48.9 billion in 2009, down from nearly $52.8 billion the previous year. But online share of total passenger rev­enues soared during the same period, from 45% in 2008 to 50% in 2009, as offline channels – driven by corporate travel agencies– suffered a 24% decline.