Skyrocketing oil prices are threatening the entire airline industry. The International Airtransport Association (IATA) expects a $2.3 billion loss this year for the industry, in contrast to the formerly forecasted $4.3 billion profit. The soaring price for aviation fuel increases the airlines’ cost of operation and finally, they will have to pass on the added costs to passengers. The IATA expects that airlines charging $40 for a bag and $20 for a meal will become a standard practice and that budget flights might disappear completely.
This year, several airlines have already ceased their operations and others could follow. But the expected consolidation has come to a halt as many airlines fear that they can’t afford acquisitions or mergers for now. Instead, airlines are likely to struggle to survive and hope to recover after competitors will have gone out of business. Especially low cost operators and smaller airlines are in danger. But even major players like United and American Airlines feel the pressure and suffer from extensive losses. The airlines are facing a real dilemma as they’d have to pass on the increase in costs to passengers, but as demand will unavoidably slump with higher prices and the most important aviation market, the U.S. suffers from an economic downturn which results in less demand there, some airlines can’t simply increase their fares. A weakening in demand actually results in lower prices. And most important for profitable flight operations is seat occupancy. Higher seat occupancy is the #1 safeguard against losses. Reducing their capacities and loosing market share is risky as the total revenue could drop and it could get even harder to cover the high fixed expenses. Thus, retiring planes is only sensible if old gas-guzzling aircraft are pulled back.
But there are airlines which are not in trouble at the moment. German Lufthansa’s goal is to match or even exceed last year’s record profit in 2008. And other major airlines like Air France-KLM or BA are likely to emerge stronger from the crisis. Airlines which are better protected by fuel hedging can delay the extremely negative effects of the sky-high fuel costs while those airlines that didn’t take sufficient measures to protect themselves are struggling to survive.