Airlines and passengers are paying the bill for sky-high oil prices

 Europe’s biggest airline, Air France-KLM, announced its first quarterly losses in five years and warned of an “awesome challenge” for the entire airline industry. Air France-KLM’sprofit collapse is in a row with the problems of numerous airlines in the US and around the world. The world’s largest airline American Airlines announced that it would cut jobs and flights, retire some 75 jets as well as to charge a fee for checking even one bag.  The Scandinavian airline Finnair also announced a profit collapse due to the high oil price. The budget airline Ryanair which does no fuel hedging to protect against rising prices is also being hurt by high oil prices.

Air France-KLM’s CEO Jean-Cyril Spinetta and many analysts expect that the upcoming shake-out will threaten budget airlines, which rely on low fares as their business model to attract passengers and are – as in the case of Ryanair  – not protected by fuel hedging, as well as national airlines with overage fuel-guzzling planes. The first intercontinental budget airline Oasis Hongkong had to cease its operations on April 9th – another victim of soaring oil prices. The humble Italian national airline Alitalia is also at risk. Its fleet is overage, its debt high and rising by one and a half million euros a day. The potential buyer Air France-KLM is not interested anymore as they anticipate that Alitalia won’t be profitable in the medium-term. The Italian governments’ new  €300 million loan to Alitalia might be denounced as illegal by the EU.

Air France-KLM now intends to pass on two thirds of the increased prices to passengers (the airline has already raised prices 17 times since 2004), to reduce its seating capacity and to operate long-haul routes by more fuel efficient aircraft like the A380. Another challenge is the allegation of price fixing in the airlines’ cargo business which is investigated by the EU and the US. Possible fines could cut profits even further.

However, Air France-KLM is very likely to survive the current crisis as well as most other major airlines which are expected to use consolidation for acquisitions. Europe’s second largest airline Lufthansa might take a share in troubled Austrian Airlines and eventually overtake it. Most budget airlines could disappear which would favor the big players Ryanair, Easyjet and AirBerlin that has taken over several smaller German competitors and is focusing more and more on intercontinental destinations. Easyjet and Ryanairare in a good position due to their very young fleet which they purchased at a sensationally low price during the aviation crisis in the aftermath of 9/11.

That demand will deteriorate is inevitable as passengers won’t accept ever rising prices. People will try to go by train rather than to fly, businesses will try to cut on their travel expenses and do more video conferencing. I doubt that the aviation boom of the last years will continue in the pace we got used to. While fares had been falling for a years due to increased efficiency and competition, airlines now struggle to remain profitable without risking to loose market share and loyal customers.

http://www.iht.com/articles/2008/05/22/business/carrier.php?page=1

 

 

 

 

 

 

 

 

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