In an ailing economy and a time when consumer confidence is at an all time low, airline companies are slashing prices to attract and entice customers.  How will this affect the industry and the exchange traded funds (ETFs) that track the sector?

Airlines are seeing fewer and fewer travelers and have to do something to fill their seats.  In fact, Continental Airlines (CAL) recently reported that the percentage of occupied seats has decreased to 72.5%, from 76% a year earlier and Delta (DAL) is planning to further cut its capacity for 2009 by anywhere from 6% to 8%, states Mike Esterl of The Wall Street Journal.

To drum up demand, the airlines have slashed their prices by up to 40% from their peak last June. Round-trip airfare from San Francisco to New York can be found as low as $250 per ticket, trips from New York City to Amsterdam have fallen below $400, and from Chicago to Sydney they go for less than $1,000. British Airways has even gone so far to offer round-trip airfare from New York and other major cities across the pond to London for under $500 and is offering buyers of discounted tickets two free nights at hotels across Europe.

With huge declines in crude oil prices, the airlines were hoping that in 2009, they could make up for some their losses suffered in 2008 by maintaining price levels. Because of skittish consumers, though, this plan doesn’t seem to promising. Fortunately for the industry, there are some consumers who are jumping at the opportunity to travel and visit those cities or countries that they have always wanted to.

An ETF that might feel the wrath of lower prices is the Claymore/NYSE Arca Airline ETF (FAA), down 32.6% over the last month; CAL is 12.3% and DAL is 5.6%

The opinions and forecasts expressed herein are solely those of Tom Lydon, and may not actually come to pass. Mr. Lydon serves as an independent trustee of certain mutual funds and ETFs that are managed by Guggenheim Investments; however, any opinions or forecasts expressed herein are solely those of Mr. Lydon and not those of Guggenheim Funds, Guggenheim Investments, Guggenheim Specialized Products, LLC or any of their affiliates. Information on this site should not be used or construed as an offer to sell, a solicitation of an offer to buy, or a recommendation for any product.