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» Same old air story » $treet Surfer on airlines » Sunday Wrapup

Want another reason that the Dow Jones Industrial Average may not be ready to roar back to life? The Dow Theory.

The Dow Theory is the belief that a significant trend for the blue chip index is not confirmed until both the Dow Jones Industrial Average and the Dow Jones Transportation Average have reached new highs or new lows. Until they do, the market averages will fall back to their previous trading ranges.

The idea was born during a time when railroads ruled. In fact, before 1970, the Dow Jones Transportation average was known as the Dow Jones Railroad Average. The railroad tie (no pun intended) was the function of an industrial economy. When the economy was booming, goods were made and the railroads delivered them. When things slowed down, so did the rail deliveries. And rail stocks fell out of favor, to be replaced by trucks (thank you Interstate Highways) and air transportation, hence the renaming of the index to Transports. The transport index now boasts six airlines, five trucking concerns, four railroads, two air freight companies, and one each of marine transport, industrial services and transportation service companies.

Therein lies the problem. The transportation average will never get off the ground being so heavily weighted with ailing airline stocks.

The six airlines that are in the Transportation average are: AMR, parent of American Airlines; Continental Airlines (having replaced the bankrupt US Airways); Delta Airlines, Northwest Airlines; Southwest Airlines, and UAL, parent of United Airlines. All are losing concerns except for Southwest.

Profits require crummier service

So, get ready for a double whammy. Your tax dollars may be used to bail out the airline industry, and once the industry is back in the air, you'll be paying higher ticket prices and enjoying the experience a lot less.

The latest news comes from Continental Airlines, which plans to reduce annual expenses by $350 million through capacity reductions and 100 other cost-cutting moves. Last week American Airlines, a division of AMR Corporation, said it would slash 7,000 jobs, retire aircraft and cut back on flights in an effort to return to profitability. And all of this comes on the heels of US Airways filing for Chapter 11 bankruptcy protection. Many industry watchers believe the next could be United Airlines, which has warned of a possible bankruptcy filing.

Certainly the events of Sept. 11 severely crippled the airline industry. But this was an industry that was cruising for a bruising long before September 11, 2001, thanks in large part to excess capacity and ridiculously high labor costs.

Now the chickens have come home to roost, and in order to stay aloft, there will be some changes made.

The business model will be the first to change. Instead of relying on sky-high business fares, look for the industry to level the playing field. As businesses have cut back on air travel, the leisure traveler will be forced to pay up to make up the difference. The days of the cut rate 14-day advance purchase price may be over. There may still be some deals to be found on the Internet, but they will be few and far between.

Look for further consolidation. There may no longer be a compelling argument for six major network airlines. And with fewer airlines, expect fewer departure and arrival choices. In an effort to become more efficient operationally, the flow of traffic will be more evenly divided throughout the day. Anticipate fewer peak-time flights, fewer direct flights and longer layovers.

The good news is that as airlines try and agree on code-sharing, you might be able to use those frequent flier miles on carriers other than the one that issued those miles. The bad news is that as airlines try and make up for those lost arrivals and departures, they will pack you in like sardines -- even less room than is offered now.

And speaking of sardines, you may want to bring your own can. The airlines will cut back on what they now call food service. Sardines are probably more nutritious than pretzels anyway.

If you're in a city where air travel is dominated by one big carrier, look out. With little or no choice, you'll be forced to pay up. But at least you'll have service. In some of the less populated regions of the country, you may have no service at all, unless regional airlines step in to fill the breach. If you're fortunate enough to have a secondary airport nearby, you may luck out. Think of what successful low-fare, low-cost Jet Blue has done for the Long Beach Municipal Airport that serves the greater Los Angeles area.

Make no bones about it. The airline shakeout is going to be painful for some time to come. But once they get their act and balance sheet together, airlines will return to profitability and have less of the cyclical roller coaster ride that has made fliers and investors airsick.

And once the airline sector starts improving, the Transportation average will rise, and be the wind beneath the wings of the Dow Jones Industrial Average.