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U.S. Airline Industry Headed Toward ‘Catastrophe’ at Current Oil Prices

Written by thomas · Filed Under Aeronautics News 

June 13, 2008

thomas

Several Airlines Likely to Fail; Affordable, Frequent Air Travel and Jobs
at Risk

WASHINGTON and RADNOR, Pa., June 13 /PRNewswire/ — At current oil
prices, several large and small U.S. airlines will default on their
obligations to creditors beginning at the end of 2008 and early 2009,
according to a study issued today by AirlineForecasts, LLC and the Business
Travel Coalition. The study shows that $130/barrel oil prices will increase
yearly airline costs by $30 billion, while airlines will be able to
generate only $4 billion in fare increases and incremental fees. The
implication of this alarming trend is that several large and small airlines
will ultimately end up in bankruptcy, and of those, some will be forced to
liquidate.

“If oil prices stay anywhere near $130/barrel, all major legacy
airlines will be in default on various debt covenants by the end of 2008 or
early 2009,” the study conducted by AirlineForecasts for BTC states. “U.S.
commercial aviation is in full blown crisis and heading toward a
catastrophe.”

“Airlines are the primary source of inter-city transportation, critical
to national and local economic development, the flow of human capital,
movement of just-in-time parts for manufacturing, perishable food and other
goods critical to our economy,” the study says. “With airlines gravely
threatened, so is our economic well-being.”

Findings:
— The top 10 U.S. airlines will spend almost $25 billion in higher fuel
costs this year over last year when jet fuel averaged $2.11 per gallon.
Fuel hedge benefits could offset $5 to $6 billion of the increased fuel
costs.
— Earnings for the group, when one-time reorganization charges are
removed, were less than $4 billion in 2007, the only year of
profitability this decade. The group could lose as much as $9 billion
over the next 12 months if the current range of oil prices holds.
— Industry fares will have to increase at least 20% — across the board
and on average — just to cover the dramatic gap-up in fuel costs from
2007. This is not possible given the level of uneconomic seat capacity
in the system today.
— The upshot of higher fares is less traffic, and given a reasonable
estimate of price elasticity, the industry will eventually be forced to
shrink its seat capacity by 15% to 20%. However, there is no guarantee
that a transition to a smaller, more expensive (for the consumer)
airline industry would be successful and sustainable.
— Airlines have the ability to raise some cash, and moreover, suppliers
such as aircraft manufacturers, leasing companies and travel management
companies will have an incentive to support large airlines that provide
a stream of value. Nevertheless, without a swift reduction in the price
of fuel, the industry is headed toward a massive failure that will
result in more bankruptcies, including liquidations.

“The U.S. airlines, and those who depend on them, are watching with
growing alarm as their cash reserves fall precipitously toward zero as the
price of oil, already at unsustainable levels, continuously spikes into
uncharted territory,” the study says. “These airlines have never faced a
darker future.”

“Brand name legacy carriers that we and American communities from coast
to coast have depended upon for decades to provide us with affordable,
frequent air service are running out of cash, and therefore, toward a date
with bankruptcy and liquidation,” the report warns.

“Airlines can attempt to radically shrink the industry,” the study
states. “But given the competitive situation they face, it’s highly
unlikely that they will have the ability to reduce capacity to levels that
will allow all of them to survive. Instead, absent direct policy
intervention, the likelihood is several airlines will fail.”

“Stabilizing this ailing industry must become a national policy
priority,” the report states. “Many Members of Congress, federal regulatory
officials, state legislators and Governors have yet to fully appreciate the
devastating impact an oil-crippled airline industry will wreak on our
culture and our national and local economies.”

SOURCE Business Travel Coalition

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