After several years of heavy losses, efforts by major US airlines to restructure their businesses show signs of paying off. Labor costs as a percent of revenue have declined, load factors have increased substantially and many US majors have grown their share of international flying. Nevertheless, airlines have a lot of work ahead—and need to prepare for industry consolidation—if they expect to earn returns that exceed their cost of capital over a full business cycle.
In Europe, as low-cost carriers have expanded aggressively, network airlines increasingly compete for the high-yield, long-haul traffic. Consolidation is likely in Europe as well, as airlines are pressed to manage capacity in line with demand and invest in…