This morning, it appears the process is well underway.

Of course there’s the news that United Airlines planning to retire 20% of its mainline fleet by the end of next year (up from its original plan of 7%), and slashing routes accordingly. The details are still to be worked out but already it’s been decided that Los Angeles to Hong Kong is history.

But on top of that, USA Today has pored over all the major carriers’ schedules for this coming October, compared them to last October, and found the following:

• Significantly fewer flights to the major vacation/convention destinations — Orlando, Vegas, Honolulu. The tickets have been too cheap for too long to even begin to cover costs
• Fewer flights to big-city airports like Oakland and Chicago-Midway that exist in the shadow of hubs like SFO and O’Hare (and were huge growth stories just a few years ago)
• At least 50 smaller airports will see service levels drop by at least one-third
• 15 of the smallest airports are losing service completely with the shutdown of Air Midwest

The regional jets seating 50 or so passengers are especially cost-inefficient now. That means no more direct flights from Washington-Reagan to Columbus, Ohio; Boston to Norfolk, Virginia; or Cleveland to Chicago-Midway.

Kansas City, where 16 routes were added just last year, will see a 16% year-over-year reduction in service by this fall.

All told, the Air Transport Association says 60 communities that had air service last year have lost it this year, with another 37 to come by year’s end.

Curiously, a couple of the cities mentioned in the article happen to have some of the highest home foreclosure rates in the country. Stockton, California will lose a third of its service by this fall. Merced, California has lost all commercial service already. Coincidence?

And this is with oil in the $125-135 range. What happens at $150 or $200 (which even perma-Pollyanna Daniel Yergin allows as a possibility now)? Silent spring, that’s what.

Update: After bringing the USA Today article to Byron’s attention, he replies:

With six more months of high oil prices, you will not recognize the airline system — not just in the US but across the world.

This will play havoc with the world’s tourism industry, the largest direct or indirect employer of people on the planet.

Hawaii flights down 25%? No driving to Hawaii, eh?

And pity poor Disneyworld and Universal Studios at Orlando… Sorry guys. If I have to walk to get there, I ain’t coming.

And what happens to “ecotourism?” This is the ultimate in not disturbing the environment…. You’ve got the “eco,” but no tourists. So the locals will have to revert to cutting down the rain forest and eating the exotic animals to survive, right?

I especially like this line from the USA Today article….

Kansas City air service manager Justin Meyer says Kansas City is emblematic of changes playing out around the country. He thinks what’s happening at his airport will not be the exception.

“We might be on the leading edge,” he says.

Yep, the leading edge of what????

If the 2-hr flight from Boston to Norfolk is now going to become an 8-hour ordeal, with a transfer through JFK or whatever….

Well, we have a problem.

Should you drive instead? Turn it into a long day of driving, each way…. if you can buy gas along the Interstate.

So a one-day business trip becomes a three-day trip, in the best of circumstances.

Or, if you don’t want to drive, where is the passenger rail system to take up the slack? Whoops. No choo-choo.

Wow, the opportunities for disaster are legion in all of this.

As are the opportunities in companies with proprietary technology that won’t rescue us from Peak Oil, but can make the transition to whatever’s coming next a little easier. Byron has his eye on a company that could one day put oil refineries out of business.

Source: ‘Silent Spring’ Already Setting In

And you know what? The rancor you may receive along the way is actually a good thing – as I’ve discovered at first-hand. When I wrote for TheStreet.com, the more hostility I encountered from readers, it usually meant that I was on the right track.

For example, during the height of the real estate boom, I recommended shorting Florida homebuilder and landowner St. Joe Company (NYSE: JOE). You should have seen the reaction I received! I got so much hate mail (and even a few threats) that I was sure it was a slam-dunk. It was. Within months of my column, JOE shares plunged about 50%.

I’ve enjoyed many calls like that over my career. But this one could be the most ambitious and optimistic one yet.

That’s because if there is one market industry that is so unpopular and so universally hated right now that you’ll probably think I’ve lost my mind to even suggest that it can bounce back. Can you guess what it is?

Ladies And Gentlemen… Welcome Aboard As We “Struggle For Survival”

I believe you need to keep your eyes on the airlines.

There… I said it.

I can imagine the incredulous look on your face at the moment – and I can understand why. Let’s deal with the bad news first…

The biggest and most obvious pressure right now is oil sitting at $126 a barrefl. Jet fuel has soared 50% since January alone and it doesn’t take a rocket scientist to know that this is disastrous for the long-term health of the industry. On Monday, chief executive of the International Air Transport Association (IATA), Giovanni Bisignani said, “The situation is desperate” and the entire industry is “struggling for survival.”

Already, 24 airlines have folded since the start of the year, with Britain’s business class-only airline, Silverjet, becoming the latest victim on May 30.

The group says the airline industry’s fuel bill will soar by $40 billion this year to a total of $176 billion. If oil prices edge back towards the record of $135 a couple of weeks ago and continue to trade there, it says that would turn the industry’s $5.6 billion in profit last year into a $6.1 billion loss. However, if oil drops back to $107 a barrel, that loss would “only” be $2.3 billion. But no matter what the price is, the problem is compounded by the weak economy and soaring consumer costs.

For sure, the industry is praying that oil is not just taking another temporary breather at the moment on the way to $200 (as some economists believe).

That’s the bad news. Now let’s look at the other side…

The “Nickel And Diming” Continues… But Planes Are Still Packed

Have you flown lately?

As I write, I just arrived in Lake Tahoe, where I’m speaking at an investment conference after another long plane ride from Florida.

I’ve been on an airplane at least once a month (and usually more) for the past year. But despite all the gloom and doom projections, I can’t remember the last time I had a vacant seat next to me. In fact, I can’t remember ever seeing many empty seats at all.

With record high oil prices squeezing profit margins, airlines are figuring out new ways to maximize revenue.

Many have imposed passenger fuel surcharges, which are increasing in line with oil prices (just today, British Airways’ latest surcharge increase came into effect – the 11^th time the airline has hiked it). Some are now charging for checked bags, meals, even headsets.

While this “nickel and diming” approach doesn’t make customers happy, airlines know that many folks have no other choice. Sure, they can take Amtrak if they don’t like it – but that option is often unrealistic.

So while others may scoff, I’m going to ask whether it’s possible to profit from the airline industry…

A Two-Year Tale Of Woe… But Watch For “Basing”Take a look at the graphic below. It’s a two-year chart of the AMEX Airline Index ($XAL).

In a word: Awful. And just as I expected back in September.

In my September 25, 2007 column, when the index was trading in the mid 40s, I said:

“I expect the index to slip back to support at $40. But with oil prices rising in what is usually a quieter period for airlines before the busy holiday season, I wouldn’t be surprised if the index breaks that support level – particularly if the broader stock market (still under some pressure) turns south. In that case, we could see a serious selloff.”

Yep, I’d say so! I certainly don’t suggest that you try to “catch a falling knife” here. However, don’t forget that the market is a forward-looking mechanism. This means that if stocks are rising (or simply stop falling) during a recession, it’s because the market is projecting a recovery.

Keep an eye on the XAL chart. Should the index “base” (stop going down and then flatline), or even reverse the downtrend and head higher, the market is likely signaling a recovery.

I wouldn’t necessarily get into airline stocks for the long term, as I believe the business model is flawed, but an intermediate-term trade seems quite reasonable once the bleeding stops.

And if you’re looking for a couple of the best individual companies (or at least ones whose charts don’t look as abysmal as their peers), check out Alaska Air Group (NYSE: ALK) and Southwest Airlines (NYSE: LUV). Keep them on your radar, as they could be early indicators for the broader sector’s recovery. At that point, you might be able to pick up some bargain basement airline stocks and turn it into a meaningful gain.

Buckle Up… The Seat Belt Sign Is OnI acknowledge that this call may be a bit early, but I want you to think about it now, so that when the time comes to act, you’ll be ready to pounce and know what to do, rather than considering the idea for the first time.

But be warned: Buckle your seatbelts and make sure your seat and tray-table are in the upright and locked position. The airline outlook is likely to be turbulent for a while longer. However, once it stops, the skies may be quite friendly to your portfolio.

Hoping your longs go up and your shorts go down.

Marc Lichtenfeld

Source: Can You Profit From the Market’s Worst Industry?