Nowhere have signs of an economic upturn in the US economy been welcomed more eagerly than in the commercial-airline industry. Already ailing from the global economic slump early in 2001, airlines then became the prime industry victim of the September 11 terrorist attacks. The impact of the current downturn in air travel has been severe not just on the airlines but also on lessors and aircraft manufacturers, which have seen their order books shrink as a result of numerous cancellations and postponements. Now, with signs of an economic updraft accumulating, many across the industry express hopes that demand will recover quickly. The optimists point to increases in travel during the first quarter of 2002 and also assume that the airlines learned how to manage cyclicality better after the last cycle.

We do not expect such an optimistic scenario of recovery but rather see airlines struggling with a far more complicated and difficult trajectory. At a time of unprecedented risk and uncertainty for the industry, an examination of its fundamentals reveals nothing to suggest that this downturn will be any shorter or less severe than previous ones, which typically lasted at least three to four years. Indeed, most signs suggest...