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Airline industry watchlist (2)

Low-cost airlines soared this decade with cheap fares and helped push several traditional U.S. carriers into bankruptcy, but their struggles and failures now are providing little relief for troubled bigger rivals. But as it happens in the recessions with most of the cost-lead companies, the airlines who compete based on low fares are the first to feel the blade of the cost increases.

Aside from fare increases in selected markets, it is unclear how major airlines, now slashing domestic service to stay aloft, would react to additional weakness and unwinding in the low-cost sector.

Smaller airlines most likely to fail are those that depend on discretionary travel, and that market has little appeal for large network carriers courting business travelers, said airline consultant Robert Mann.

“I don’t think (legacy airlines) are seeking those customers. So I don’t think it affects them directly,” he said.

In the past several months, seven small U.S. airlines have stopped operating due to record high fuel prices and softening travel demand. These included Skybus Airlines, ATA Airlines and Aloha Airlines.

While new potential bankruptcies do not appear imminent, analysts have this month amplified their concerns about worsening finances at low-cost airlines, especially for 2009. As has shown in a previous article, the airlines face now a tougher economic environment, where their economies of scale are seriously endangered.

“It’s no secret that a couple of them are in a much more precarious liquidity position now than their large competitors,” said William Warlick, a senior director at Fitch Ratings.

Moody’s Investors Service this month downgraded debt ratings for AirTran Airways parent AirTran Holdings Inc, and forecast a “material deterioration” of the airline’s cash position unless market conditions improved. Privately held Midwest Airlines, a staunch competitor of AirTran, is cutting flights, reducing its work force by nearly half, and seeking employee concessions.

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