How the Airlines Could Be Hurt

Until this morning, airline companies were in the midst of a remarkable rebound. United, for one, had just announced its first quarterly profit in six years. But that bright picture changed abruptly today. Airline stocks fell as a foiled plot to blow up flights leaving London raised concerns about the cost of additional security and delays. But the bigger economic threat to the recovering industry might yet come from an altogether different direction — new restrictions about carry-on luggage.

The U.S. Department of Homeland Security immediately banned passengers from bringing liquids and gels onboard in response to the plotters' planned use of liquid explosives, which can be concealed in items ranging from shampoo bottles to soda cans. British authorities imposed far more severe restrictions that banish all bags (including purses) from the cabin, and allow passengers to carry only a handful of personal items, such as wallets, passports, glasses (no cases), keys, baby formula (if tasted by an accompanying adult), and unboxed tampons.

Depending on how much these new policies stick, airlines could lose passengers, especially those flying for business — the most coveted travelers since they often buy more expensive seats, or tickets at the last minute, when fares are usually the highest. "If screening doesn't permit, for example, laptops and BlackBerries, then the issue I think is mostly one of whether business travelers feel their priorities are compromised," says Robert Mann, president of airline consultancy R.W. Mann & Co. "If so, there will be far less business travel."

Airlines could also be hurt by a decade-long trend of increasing overhead bin space. As the carriers have made more accommodation for passengers' preference to carry on larger pieces of luggage, they've simultaneously invested less in their checked-bag systems. For a business, that makes sense: why would an airline pay someone to handle your bag if you're willing to do it for free? If carriers must revert to a system of more checked luggage, then the higher cost of loading and unloading returns. "That's a labor-intensive process," says Mann, "and it has a monetary impact."

The good news was that in the past year, the domestic airline industry has begun to emerge from a long economic slump, marked by years in the red and numerous bankruptcies. Before Thursday's events, John Heimlich, chief economist of the Air Transport Association, a trade group, was predicting that U.S. airlines would lose just $500 million in 2006 — a dramatic improvement over last year's $5.7 billion loss. For 2007, he was predicting a profit. And that upswing, no matter how preliminary, puts the industry in a better position to deal with the current blow.