The other carriers are reeling too. The industry is acting swiftly to remove capacity – cutting routes and frequencies – in anticipation of reduced traffic in the coming months. And the U.S., industry isn’t alone.

Europe’s biggest carrier, Air France-KLM, warned of a profound “reshaping” of the global industry amid record fuel prices.  The European carriers aren’t nearly as exposed as their U.S. counterparts, but they’re certainly feeling the pain.

The International Herald Tribune notes, “With its bleak outlook for the airline industry, Air France-KLM joined American Airlines, the world’s largest carrier, which said Wednesday that it was adding fees, cutting hundreds of flights in the United States, and eliminating thousands of jobs to cope with the crisis.”

Asian carriers are reeling, too. Australian carrier Qantas hiked its fares for the second time in a month while Japan Airlines said it would increase its fuel surcharge along with its competitor, All Nippon.

Among the Middle Eastern carriers, Emirates looks to be in the best shape due to its healthy cash position. In fact, this may be their opportunity to take advantage of the worldwide economic downturn to fortify its position as a global player.

As other carriers cut back, Emirates can accelerate its plan to connect European and Asian traffic through growing Dubai hub. But this begs a question about its hungry rivals, Etihad and Qatar Airways: Can the region sustain three major carriers if there is a worldwide economic downturn?

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The forecast for airlines is gloomy and getting darker by the day. Network carriers in the U.S. are facing high costs for aircraft ownership, fuel, labor and maintenance. With rising fixed costs, no pricing power and negligible profit margins, reducing capacity to relieve pricing pressure seems to be mission imperative.  But network carriers are reluctant to reduce their inventories much further.

Due to their low credit ratings, airlines can’t borrow money at reasonable rates to invest in more fuel efficient planes and more efficient facilities.

All this means that the industry will have to consolidate – out of sheer necessity – despite the thorny challenges of integrating large, people-intensive organizations and fragmented legacy systems.

Can consolidation fix the ailing economics of the airline industry?

It’s too early to tell, but it probably won’t be enough.  In the end, new and innovative airline business models are needed to solve the industry’s deep, structural problems.

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