US airlines flying towards ‘massive failure’

A stark warning of further US airline collapses has been given as high oil prices hit yearly costs to the tune of $30 billion.

A study by the Business Travel Coalition and AirlineForecasts estimates that carriers will only be able to generate $4 billion in fare increases and incremental fees while fuel prices are record highs of $130 a barrel.

“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 report said.

“If oil prices stay anywhere near $130 a barrel, all major legacy airlines will be in default on various debt covenants by the end of 2008 or early 2009.

“US commercial aviation is in a full blown crisis and heading toward a catastrophe.”  

The report added: “Airlines are the primary source of inter-city transportation, critical to national and local economic development, the flow of human capital, movement in just-in-time parts for manufacturing, perishable food and other goods critical to our economy.

“With airlines gravely threatened, so is our economic well-being.”

The top ten US carriers will spend almost $25 billion in higher fuel costs this year over 2007, according to the study. Fuel hedging will offset only $5-$6 billion of the increased fuel costs.

These airlines could lose as much as $9 billion over the next 12 months if the current range of oil prices hold.

Fares will have to rise by 20% across the board just to cover the dramatic hike in fuel costs – but this is not possible given the level of uneconomic seat capacity in the system, the report says.

Airlines will have to trim capacity by as much at 20% but there is no guarantee that a transition to a smaller, higher fare industry would be successful or sustainable.

“Airlines can attempt to radically shrink the industry 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,” the study warns.

“Instead, absent direct policy intervention, the likelihood is several airlines will fail.”

The report called on Washington to make the ailing industry a “national policy priority”.

“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,” it added.

Carriers such as American Airlines, Continental and United have already announced major cuts in an effort to counter the high cost of fuel.   

by Phil Davies