POSTED: 27 JUNE 2008 - 9:00am EST

Major turbulence ahead for airlines

by Alexandra Marks on 26 June 2008 in The Christian Science Monitor

Industry officials and analysts urge Washington to act to avert a collapse

America's aviation system could be at risk of collapsing by the beginning of next year.

That warning from aviation experts has prompted some industry leaders to call for re-regulation, something considered almost heresy until now. Others are urging Washington to do more to rein in the oil speculators pushing up fuel costs.

But there is agreement among airline officials and analysts that Washington and the two presidential candidates need to recognize the severity of the crisis and take some action now to avert an economically crippling collapse in the near future.

"Unless something is done to move toward some kind of fix, we're going to see every one of our major airlines in bankruptcy," says Robert Crandall, former chairman of American Airlines. "If that isn't enough of a crisis to alert everybody, then I don't know what it will take."

As a result of the spike upward in oil prices, almost every major airline is now losing millions of dollars each quarter.

Unless the price of oil comes down, most are expected to run out of cash by the end of this year or the beginning of next. In a bid to stave off bankruptcy, they're already retrenching. They plan to lay off an estimated 25,000 employees, park hundreds of planes, and cut the number of flights they offer.

In addition, a recent study by the Business Travel Coalition, which represents corporate travel managers, estimates that 100 regional and 50 major airports nationwide will lose some of or all their air service by the end of the year.

"I've been trying to turn on the emergency sirens to raise awareness in Washington and back home," says Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa. "And I think people are finally beginning to [wake up]."

Airline officials visit Washington

Representatives of the major carriers were in Congress this week, urging action to discourage speculation in the oil markets. Some analysts blame that speculation for the almost doubling of the price of jet fuel in the past year.

Fuel costs used to be the airlines' second-largest operating expense behind personnel costs. Now it's their top expense, accounting for between 30 to 50 percent of airlines' operating budgets, according to the Air Transport Association, which represents the major carriers. The airlines are hindered by several things in hiking prices to offset fuel costs: First, they sell most of their tickets in advance, so most people flying this summer are using tickets that were bought before the recent jump in oil prices. So most of the time that planes take off this summer, the airlines will lose money even when the planes are packed. The major airlines are also constrained by stiff competition from low-cost carriers like Southwest, as well as by the fear that if prices go too high, people will simply stay home.

The solution, from the point of view of the major airlines, is to bring the cost of oil down.

"What we're looking for in the short term is for Congress to stop this speculation so we can get fuel prices down to a manageable level," says David Castelveter, spokesman for the Air Transport Association. "In the long term, we'd like to see the modernization of the air-traffic control system so we can continue to find ways to reduce our fuel burn."

But some aviation analysts say that is not nearly enough. For one thing, not all economic analysts believe that speculation is the primary culprit in the hike in oil prices. They argue that a major factor is concern about demand outstripping supply because of things such as the roaring economies in China and India and the political violence in Nigeria. These analysts are skeptical that reining in speculation will have much impact on oil prices.

If oil remains at about $130 a barrel, it will dramatically alter the industry's economic operating model, some aviation analysts say. Then, they argue, it will be crucial for the government to step in and re-regulate certain aspects of the way airlines operate.

"If fuel is going to stay there, we're going to have to shrink the industry by 30 or 40 percent," Mr. Mitchell says. "At a minimum, the government needs to help manage that shrinking process.… Otherwise, there'll be no guarantee that you can get from here to there."

Other issues: delays, poor service

But instead of just focusing on this immediate crisis, Mitchell and Mr. Crandall point to the record delays and deterioration in service overall. It is crucial, both say, that government and industry leaders step back and have a debate about the aviation system's priorities and how best to improve and manage its efficiency and viability.

"Every major airline is losing huge amounts of money with service standards that are unacceptable, to be generous," Crandall says. "We need to have a national transportation policy: The nation's whole transportation infrastructure is failing, and our government has no plan."

But the major airlines are opposed to any new regulation.

"We think de-regulation has been extremely beneficial to the passengers and communities that have service today," Mr. Castelveter says. "It has allowed for competitive growth and for fares that are lower than they were in a regulated market."

Some aviation analysts also oppose any attempt to re-regulate the system. They point to the success of Southwest Airlines and other low-cost carriers. They contend that better airline management and improvement of the air-traffic control system could solve some of the system's worst problems.

"Let's make sure the air-traffic control system is accommodating all that it can accommodate, and it sure ... isn't doing it now," says Aaron Gellman, an aviation analyst at Northwestern University's Transportation Center in Evanston, Ill.

Professor Gellman and others are also concerned that imposing even a small amount of regulation will lead to higher prices and an even less efficient aviation system.

"Once you let that camel's nose in the tent, it's going to set up housekeeping," says Michael Boyd, president of The Boyd Group in Evergreen, Colo. "Deregulation has worked OK, and the airlines will adjust to these oil prices. We can get through this."



POSTED: 20 JUNE 2008 - 9:30am EST

Fuel costs change airlines flight plans

image above United Airlines stewardess chats in a simulated cabin of a Douglas DC-10, in 1968

by David Armstrong on 17 June 2008 in

With fuel costs hovering stubbornly at record highs, airlines are abruptly changing course by suspending flights, slapping new luggage fees on travelers, raising fuel surcharges on tickets, switching to smaller planes, grounding older, inefficient aircraft and raising fares.

Industry-watchers say the current, fuel-driven crisis may be worse than the sharp drop in consumer demand that sent four major U.S. carriers into bankruptcy following the Sept. 11, 2001, terrorist attacks. That was one catastrophic event; this is a rolling crisis with no end in sight.

American Airlines, the world’s largest carrier, plans to cut domestic capacity by 12 percent in the fourth quarter of this year, lay off perhaps thousands of employees and charge for checking bags in economy class. American also says it will stop flying between Chicago and Honolulu and suspend some Los-Angeles-Hong Kong service.

United Airlines will cut domestic capacity 15 percent in the fourth quarter, slash 1,500 jobs and jettison its low-fare unit Ted.

Continental Airlines plans to cut domestic capacity by 11 percent in the fourth quarter and shrink its staff by 3,000.

US Airways will reduce its fourth-quarter capacity 6 to 8 percent, trim 1,700 jobs and join other airlines in charging $15 for the first checked bag.

Some will be forced into liquidation

Even all that may not be enough. In a report released Friday, the Business Travel Coalition and AirlineForecasts LLC predicted “several large and small U.S. airlines will default on their obligations to creditors beginning at the end of 2008 and early 2009 ... and of those, some will be forced to liquidate."

The study doesn’t specify which airlines could liquidate, but warns that some famous names in aviation will soon join the likes of TWA, Pan American and Eastern Airlines.

In the meantime, Goldman Sachs industry analyst William Greene wrote in a research note that airline plans to pare operations and raise fares are “a step in the right direction in right-sizing the industry.’’

But for consumers, this is unalloyed bad news. It means planes will be even more crowded and uncomfortable, there will be fewer conveniently scheduled flights — especially non-stops — and everything will cost more, from checking bags in economy class to changing bookings.

Reversing its earlier prediction of a profitable 2008, the International Air Transport Association says the world’s airlines will lose $2.3 billion this year if a barrel of crude oil averages $107 for the year; if oil averages $130, industry losses — led by reeling U.S. carriers — will reach $6.1 billion.

Non-U.S. airlines have problems too

Foreign carriers are not immune. Just in the past 10 days, Thai Airways, Qantas, Air France, Lufthansa and British Airways have raised their fuel surcharges. Moreover, BA chief executive Willie Walsh told the International Air Transport Association (IATA) meeting in Istanbul early this month that his carrier, one of Europe’s largest, intends to make unspecified service reductions this fall. Finnair, citing fuel costs, said it will slash 500 jobs.

IATA director-general Giovanni Bisignani added that one solace for travelers — the worldwide success of low-cost carriers (LCCs) — is also in jeopardy. Most LCCs spend a higher percentage of their budgets on fuel than their mainline competitors and are thus potentially more vulnerable to the soaring cost of jet fuel.

So far, airlines that have failed in the U.S. market have been mid-sized low-cost carriers such as ATA, small niche carriers such as Eos — which operated all-business class flights between New York and London — and regional players like Hawaii’s Aloha Airlines.

Analysts say U.S. carriers must raise fares 20 percent and slash capacity by 20 percent just to keep flying, let alone make a profit. Additionally, some say, major U.S. carriers need to merge outright or at least forge closer working alliances to fly through the crisis.

Consolidation or culling?

Star Alliance is one of three global associations that allow airlines to do joint marketing and maintenance and issue tickets on each other’s flights. Oneworld and SkyTeam are the other two. At a meeting of the Star Alliance airline CEOs in Beijing last December, United’s chief executive officer, Glenn Tilton, told journalists “Consolidation is the answer."

So far, it hasn’t happened. United, which lost $537 million in the first quarter of this year, has held failed talks with two potential merger partners, Continental and US Airways, in recent weeks. Delta and Northwest are still attempting to effect a merger.

Should mergers and tighter alliances not get the job done, at least a few airline executives think a Darwinian culling of weak carriers would turn out to be a good thing. Virgin Atlantic Airways chief operating officer Steve Ridgway was quoted in media reports last week saying U.S. authorities should allow airlines to fail instead of restructure in Chapter 11 protection.

“Carriers are going to go out of business, and need to go out of business," Ridgway said bluntly. “Ultimately, the industry is going to have to re-price."

In such a decidedly bearish future, higher fares may be the least of many evils for air travelers.

see also:
Island Breath: Waning of commercial aviation 6/4/08
Island Breath: End of Air Travel 5/1/08
Island Breath: Aloha to Aloha Air