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» Karen Gibbs: Dow needs airlines to thrive » $treet Surfer on airlines » Sunday Wrapup

American Airlines is slashing 7,000 jobs, putting costly airplanes on the shelf and streamlining inefficient routes. Continental Airlines plans to cut capacity by 4 percent and implement 100 other cost-cutting moves. US Airways is in Chapter 11. And United Airlines has to hack away expenses or it'll follow US Airways. Rough times for the airline industry? Sure -- but anyone following the airlines over the years knows it's business as usual.

Ever since the airline industry was deregulated in 1978, at least one major airline files for bankruptcy or finds itself on the financial ropes whenever a recession hits. It's boom or bust, and more often than not it's a bust.

According to Deutsche Bank research, the airline industry hasn't been able to earn its cost of capital over an extended period of time. "The U.S. airline industry has not had the best track record with respect to earnings growth post deregulation," noted a recent Deutsche Bank report.

That's why a carrier such as Southwest Airlines is fawned over. Southwest -- whose market capitalization is almost double that of all other major national airlines combined -- makes money, carries little debt and keeps its routes simple -- it's efficient. Southwest's execution may be the norm in many industries, but among the airlines it's about as rare as a $2 bill.

Major airlines include Alaska Air, America West, America Trans Air, American, Delta, Continental, Northwest and United. Not included is US Airways, which is bankrupt and no longer traded on the NYSE.

The problem

So what's the problem? Running an airline is among the riskiest businesses to be in. "They make money when the economy is doing well and then lose tons of it," said Steven Morrison, a professor at Northeastern University. "It's extremely cyclical."

Cyclical indeed. A lot of things have to go right for an airline to make gobs of money:

Fuel prices: A $1 move in crude oil prices changes a major airline's net income by $180 million, according to Deutsche Bank. A big reason airlines thrived in the late 1990s and 2000 was cheap oil.

Accidents: Safety counts and worries stemming from Sept. 11 helped put the airlines in their current state. Analysts are split on how much to attribute to Sept. 11, however, noting management miscues also play a big part.

Pricing: Too many airlines, online ticketing and cost conscious business travelers have fueled price wars that have cut profit margins. Meanwhile, low-cost carriers are stealing customers because they can cut prices more. In addition, government taxes and fees still play a role in tickets, accounting for about $50 of a $200 ticket, according to Deutsche Bank.

Capacity: Airline management has traditionally thought big: Big fleets, big aircrafts and big expenses. "Historically, airline management has been prone to excess capacity," said Dick Barsness, a professor at Lehigh University. "Airlines have pushed capacity beyond demand and siphoned off their profits."

That's part of the reason analysts cheered American's restructuring. It cut capacity by 9 percent and shelved 75 Fokker 100s, smaller planes that were eating up maintenance costs.

Routes: Major airlines have been hurt by complicated "hub and spoke" systems where most routes are funneled into one hub such as Chicago's O'Hare Airport. The system magnifies bad weather and congestion risks. Successful airlines such as JetBlue and Southwest have back-and-forth routes that keep planes in the air longer.

"The hub and spoke system is going to be diminished," said Barsness. "It'll remain because it still serves a purpose for full service airlines, but it'll be cut back.

The aforementioned risks could be managed if airlines didn't have such as penchant for debt. In most industries, companies that face heavy business risks aren't likely to be heavily leveraged financially. Airlines, however, make big financial bets and pile up the debt, making it one of the riskiest sectors around.

According to Richard Gritta, a University of Portland professor who has tracked the industry dating back to 1950, the airline business coupled with debt is a recipe for disaster.

"The airlines were basically financed like utilities with high debt because the agencies that used to regulate them wouldn't allow them to fail," Gritta said. "But once the regulation was lifted airlines were out of shape."

To Gritta, debt is the biggest issue for the airlines. Some airlines have as much as 60 percent of their operating profit going to interest payments. "Debt is debt and when things get bad that lever flips," he said. "When there are no profits and you owe hundreds of millions in interest you can't bargain unless you go to court."

Will they ever get it right?

Analysts say American's restructuring is a good first step. And it wouldn't be a bad thing if some majors disappeared, cutting the number of airlines from six to four. Whether it happens or not is anyone's guess.

"We grasped the need for fundamental change in the airline industry some time ago, and have undertaken both long-term structural change and measures responsive to current industry conditions," said American CEO Donald J. Carty said. "This latest round of initiatives is yet another step toward more solidly positioning American for success in the long term."

Carty's move to shave $1.1 billion in costs were applauded largely because American may be signaling a new era for the airline industry one "marking a philosophical shift towards airline operations as opposed to revenue," said Lehman Brothers analyst Garrett Chase.

Industry watchers are heartened by American's restructuring, but note the airline industry isn't going to change overnight. Hub-and-spoke carriers will still remain because you need national carriers, Morrison said.

"In my worldview, we're talking changes by evolution not revolution," Morrison said, noting that Sept. 11 and the recession hit the industry with a double-whammy. "The current situation is leading to changes at the margin. If tomorrow the economy was like it was two years ago, airlines would go back to the way they were."

And then airlines would have the same problems in next recession.