American Airlines, Continental and Delta have all announced cutbacks due to rising fuel costs.

Consumers are also being squeezed. USA Today reports that summer airfares in the US are set to rise by as much as four times thanks to spiraling oil prices.

“The sector-wide downturn is pretty textbook,” says Theo Casey in Fleet Street Daily.

Airliners tend to suffer most in a weak economy. The airlines biz is very cyclical, i.e. very sensitive to the business cycle. Revenues tend to pick up in times of economic expansion, and fall in periods of economic contraction. Airliners also are at the mercy of the oil markets, which are at all-time highs.

This isn’t just a recession. This is a recession combined with the raw asset prices getting too high to handle. Lower revenues were already on the cards with the threat of UK, US and Eurozone recessions. But throwing in oil prices that range from $125 – $135 a barrel, the problem is made much, much worse.

In terms of affordability, air travel has flown in the opposite direction of things like higher education, houses, and designer jeans,” says Andrew Gordon in Investor’s Daily Edge.

People have to fly. And, globally, it’s inevitable that they’ll be flying in greater numbers. Higher prices may slow this trend, but it won’t reverse it. Flying is already taking off in Asia. For example, China’s domestic airline industry is just a fifth of the size of the U.S.’ domestic market, but it’s growing much faster. In 20 years time, it’ll be about half the size of the U.S. market.

And market liberalization is in the air. Many more markets will soon receive a strong boost as governments ease regulations. New Open Skies agreements between the European Union and the United States and Canada are a start. Further market reform will open up Asian and North African markets. The result? The global airline industry will outperform the world economy in the coming years.

The airline industry isn’t so much broken as it is overcrowded. It’s mainly a matter of too many seats available for too few customers. If the industry continues to consolidate, supply and demand should rebalance. Then investors will be able to focus on the solid fundamentals of the industry – reasonable prices and growing demand.