How much does Vaughn Cordle know about the state of the U.S. airline industry? Well, the CEO and chief analyst of AirlineForecasts -- who has 25 years-plus of experience as a pilot for a major airline -- makes a large part of his living selling what he knows about airline finances and economics to hedge funds, government agencies and consulting groups. At the end of a week of airplane horror tales that included raw sewage flowing down the center aisle of Continental trans-Atlantic Flight 1970, I caught up to Cordle by telephone just after he landed in San Francisco -- where earlier in the week 400 people on a Cathay Pacific Airways jet had been stuck on a runway for seven hours:

Q: Is this summer going to be as hellish for air travelers as we're being told it will be?

A: I don't think so. The benchmark everyone is referring this summer to is the summer of 2000, "The summer of hell," as some call it. That was about labor issues. This summer we don't have labor issues. Traffic is back up pretty much to where it was in 2000. Fares are much lower. Load factors are at historic levels. So it's much more crowded on planes and less convenient and there are more travel hassles because of security concerns and TSA security checks. So it's a very uncomfortable summer but delays won't be as bad.

Q: What's the airline industry's biggest problem right now -- and who or what is to blame for it?

A: The U.S. airline industry is the least-profitable in the world. I believe there are too many competitors. We've been crunching numbers on all the passenger-carrying airlines in the country and there are 34 airlines that produce more than $100 million in revenue. So it's highly fragmented and hyper-competitive. We estimate that those 34 airlines in the domestic market are coming up about $8 billion short from earning their cost of capital.

The big 12 airlines account for about 96 percent of passenger capacity. They're doing quite well internationally but it's the domestic market that is not doing so well. The airlines have to crowd more people into their aircraft. Load factors (percentage of a plane's seats that are sold) have gone from about 65 percent a decade ago to in the low 80s and this summer some airlines probably will have 90 percent load factors. So this means effectively some flights have too many people and they have to turn people away.

It's crowded and airline employees are demoralized because they are working more for a lot less. And when you have to deal with more passengers, employees are working more and they and passengers are stressed out.

Q: Has the airline industry finally figured out how to make profits?

A: No. They're still losing money. This year we estimate that the major 12 or 15 airlines will earn about $3.5 billion. Now that's better than the cumulative $35 billion they've lost since 2000, so it is a turnaround year. But the airlines -- the money-losing, over-leveraged network airlines (United, American, Delta, etc.) -- have had to pull back significant domestic capacity to force those load factors up so they could offset the lower real yields (revenue per passenger carried for one mile). Unit revenue is still about 14 percent lower than it was in 2000 -– that's the revenue per available seat mile. But the yields are still 25 percent lower. So the higher load factors mask the real weakness in the airline industry, which is low yields.

Q: The Economist magazine recently said that the best thing governments can do to help the airline industry become more efficient and more profitable is to get out of the way. Do you know what The Economist was talking about?

A: Yes I do. I believe that the airline industry could naturally evolve into a more efficient industry if the government just gets out of the way, lets certain airlines fail and lets mergers and acquisitions occur. It is highly fragmented, hyper-competitive, and there are destructive fare wars. Today there was an article in USA Today that said average fares were 2 percent lower than they were last year. Yet we have 80 or 90 percent load factors this summer. So traffic is back up but average fares are at levels that are not healthy for the industry, hence the financial distress and the exceptionally high load factors. But these airlines have under-invested in their competitive resources -– human and physical -– and they've got to play catch-up. If you look at capital expenditures for most of the major carriers, it's less than depreciation, so by definition they are in a slow liquidation. So they've got to invest and replace old and aging aircraft.

Labor costs have come down quite significantly since 9/11 but the salaries are unsustainably low at some of the airlines. Some of these employees have taken 30 or 40 percent pay cuts -– and they are working more with higher load factors. So there is an unhappiness with some of the majors' employees and the industry needs relief.

Q: Is privatizing the Air Traffic Control system an important idea?

A: I think it's an important idea. If you look at the productivity increases in the U.S. airline industry, the average network airline has improved productivity from 20 to 35 percent. Even Southwest has improved productivity 20 percent. They went from 85 people per aircraft to a recent 67. United has gone from 160 people per aircraft down to 115 -- about a 28 percent improvement in productivity.

Now if you look at the Air Traffic Control system, 90 percent of the cost of the system is labor, and guess what? There's been zero improved productivity over the last decade. They have outdated systems that need to be replaced. It'll take tens of billions to modernize the ATC system and that's part of the problem. Continued...