Archive for August 5th, 2008

Oil Crisis in the Airline Industry!

Everybody has been talking about the high fuel prices for a while, also pointing out that it will hit the Airline Industry very badly. Well, we didn’t have to wait too long for the effects of the skyrocketing oil prices, THE AIRLINES OF THE WORLD ARE IN A CRISIS ALREADY. Some analysts say that this situation is definiately worse than the post 9/11 years…

Every single day in the last few months we saw news about cuts and downsizing at different airlines. We tried to sum up the recent announcements to see where we are at the moment. The overall picture is very bad with over 450 planes to be grounded, and more than 25.000 staff to be laid off…

United Airlines will ground its full Boeing 737 fleet (94 aircraft) plus 6 Boeing 747 Jumbo jets – 80 of these combined in 2008, 20 in 2009. They would close down their Ted product and transfer those 56 Airbus A320 planes to the mainline with first class seats added on board. In a message to employees, COO John Tague said the cuts are necessary and that the retirement of the 737 fleet will “dramatically simplify our fleet and reduce our maintenance liability.” Further, the retirements will remove the “oldest and least fuel-efficient jets” from service, reducing the average age of UA’s fleet by 1.3 years to 11.8 years.

Continental Airlines will ground all of its Boeing 737-300s and most of the 737-500 fleet, while keeping the New Generation models of -800 and -900s in service. Fuel efficiency is a key decision factor in this case as well.

Oil Crisis in the Airline Industry

Oil Crisis in the Airline Industry

American Airlines will ground at least 75 planes mostly from its mainline fleet this year, and has started charging USD 15 for the first piece of luggage on their North American flights. AA also increased charges by from $5 to $50 for other items including reservations service, pet carriage and oversize baggage. It estimated that the new and increased fees will generate “several hundred million dollars” in incremental annual revenue – sounds promising on their side, but sounds very bad on the passengers’ side.

That is just a drop in the bucket compared to the rise in the price of oil, however. AA’s fuel expenses for the first quarter alone were up more than $660 million, according to their CEO, and will add more than $3 billion in annual costs at current prices. He noted that in 2000 AA’s average per-passenger segment revenue was $163 and the price of oil per passenger was $24 (14%). In the first quarter of 2008, segment revenue was $149 and the price of oil was $64 (43%). “Today [the price of oil] is $82 per passenger!!” It means 55% of the revenue!! 

Air Canada considers fuel as the carrier’s single largest expense item, accounting for more than 30% of total operating expense, and at current price levels will cost the airline close to C$1 billion more in 2008 than in 2007,” it said. At current fuel prices and capacity levels, AC said it spends an average of C$230 in fuel to carry one passenger on a roundtrip journey, up from C$146 in 2007 and C$110 in 2004 (more than doubled!).

Southwest Airlines, meanwhile, was the only profitable US carrier in the first quarter and is still contemplating expansion. CEO Gary Kelly told Bloomberg News that the LCC is “willing to grow the fleet, and that’s very different than what’s going on with our competitors.” He said it may keep as many as 10 aircraft slated for retirement this year and is on schedule to add 14 new planes in 2009.

According to the Goldman Sachs Group, Ryanair, the biggest European low-cost airline may be the only one profitable airline in Europe in three years, if the price of oil remains at USD150 a barrel…

Oil Crisis in the Airline Industry

Oil Crisis in the Airline Industry (as of August, 2008)

This environment demands that we and the industry act decisively and responsibly,” United CEO Tilton said, adding that United Airlines must “reduce costs and increase revenue to respond to record fuel costs and the challenging economic environment.” He added that the carrier remains committed to all of its hubs. In a message to employees, Continental Chairman and CEO Larry Kellner and President Jeff Smisek said, “The airline industry is in a crisis. Its business model doesn’t work with the current price of fuel and the existing level of capacity in the marketplace. We need to make changes in response. … These changes will be painful…

Air Canada President and CEO Montie Brewer said. “Air Canada, like most global airlines, needs to adapt its business and reduce flying that has become unprofitable in the current fuel environment. If fuel prices remain at current levels, we can anticipate further capacity reductions.

US Air Transport Assn. President and CEO James May told a US Senate subcommittee recently that fuel price increases are “unprecedented” and “devastating” and could lead US airlines to lose nearly $10 billion collectively for full-year 2008, “on par with the worst financial year in aviation history.” He added that US carriers will spend more than $61 billion on fuel in 2008, “slightly more than the total fuel bill combined for the first four years of this decade.

In Australia Virgin Blue announced a range of capacity reductions and a A$50 million ($46.9 million) cost-savings package in response to continuing record fuel prices. The initiatives are the first resulting from its wide-ranging look into how to handle fuel prices that now account for 35% of its cost base. Blue’s view is that high fuel prices are here to stay. “It’s not a case of planning interim measures to offset a spike in the cost of fuel. All airlines must come to terms with a new reality in our industry,” CEO Brett Godfrey said. Management faces a salary freeze and Blue will commence layoffs, although no details were provided.


US Air Transport Assn. said airlines’ composite cost index in the first quarter rose 31.3% year-over-year to 228.7, the fastest growth since the second quarter of 1980 and greater than the US Consumer Price Index increase of 4.2%. Fuel climbed 28.7% and accounted for 29.4% of first-quarter operating costs. Overall unit cost rose 12.4% to a record 13.72 cents while yield climbed 2.6%.

Qantas Airways CEO Geoff Dixon summed up the current situation very well saying that “the airline industry is on the verge of a period of consolidation into a few very large carriers that will be able to cope better with higher fuel costs.” He further added that a “new aviation world order” is coming, according to the Australian Associated Press. “And we believe strongly at Qantas that over time, consolidation will transform aviation. . .It will produce a few very large and extremely efficient global airlines with a portfolio of interests and a portfolio of brands.

And as we have reported earlier, already 20 airlines have gone bankrupted since the beginning of the year, which is never a good sign… And some analysts we can see as many as 50 of them gone by the end of the year…

by balint01


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