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Companies

Transport

AIRLINES FACE BATTLE FOR SURVIVAL
By Kevin Done

Financial Times (London)
May 22, 2008

http://www.ft.com/cms/s/0/cb8af0b4-2825-11dd-8f1e-000077b07658.html

PARIS -- The structure of the world airline industry is going to change “profoundly,” Jean-Cyril Spinetta, chairman and chief executive of Air France-KLM, warned on Thursday, as carriers struggle to come to terms with a doubling of the oil price in the past 12 months and weakening economic growth.

“There will be major restructuring. Things are changing violently and quickly,” he said.

The outlines of the winners and losers in the latest global aviation crisis are already becoming clear at frightening speed.

The long-term survivors will be the airlines with already strong balance sheets, that are going into the storm with low debt levels and big cash reserves. Many of these have taken the opportunity offered by their financial strength to hedge a large part of their fuel requirements for the next 12 to 24 months.

Financially weaker airlines have been unable to afford such protective insurance.

Some, such as Ireland’s Ryanair, Europe’s leading low-cost carrier, chose to gamble that the oil price would fall back. It is now paying the price.

The winners will also be the carriers that have continued to invest in new aircraft and which therefore have the most fuel-efficient fleets. They include Ryanair and EasyJet, the dominant European low-cost carriers, and AirAsia, the low-cost leader in Asia Pacific.

[INSET: () 1) Jet fuel and crude oil prices: Brent front month ($ per barrel)/Northwest Europe Jet Kerosene ($ per ton), January 2007-May 2008. -- 2) Airline fleets: Average age in years (2007).]

Among the full service network airlines the winners will include those with the strongest hubs, which can draw in feeder traffic from wide regions to fill more seats on their long-haul services and which have the flexibility within their networks to move capacity around the world from the regions where the economy is weakening to the stronger performers.

Airlines likely to emerge more profitable from the crisis and with increased market shares include the European big three, Air France-KLM, Lufthansa and British Airways, from Asia Pacific, Singapore Airlines, Hong Kong’s Cathay Pacific and Australia’s Qantas and from the Middle East Dubai-based Emirates, which is using its location to build a true world hub in the Gulf.

Inevitably it is fringe players and recent start-ups that have proved most vulnerable in the first months of the unfolding crisis. Specialist all-business class carriers Maxjet Airways and Eos Airlines have already folded. So has Oasis Hong Kong Airlines, which tried to bring radically lower fares to long-haul routes between Hong Kong and Europe and North America.

Eight U.S. airlines have already filed for bankruptcy protection this year, including established players Frontier and Aloha Airlines, and a low-cost start up, Skybus. Of the eight, five have already ceased service, including Maxjet and Eos. U.S. carriers had a combined pre-tax loss of nearly $2bn, excluding special items, in the first quarter.

The very biggest in the U.S. are seeking salvation in each other’s arms in the hope, possibly misplaced, that mergers and consolidation can help to cut costs.

Delta Air Lines and Northwest Airlines have already announced a plan to merge, while United Airlines, US Airways and Continental Airlines ponder which could be the right partner.

The U.S. industry illustrates most starkly how quickly rising fuel bills can bring airlines to the abyss, when they are burdened by large numbers of ageing, fuel-guzzling aircraft.

Several leading U.S. airlines are not long out of Chapter 11 bankruptcy restructuring after the deep recession of the early years of the decade. They are again pressing the panic button after managing neither to restore their balance sheets nor to renew their fleets.

American Airlines, the industry leader, has the distinction of being the only U.S. legacy carrier that has not sought protection from its creditors in previous downturns. But it is still operating around 300 ageing MD-80s in its short-haul domestic fleet. The airline said on Wednesday it would be forced to retire 40 to 45 of them in response to record fuel prices. It is also retiring 35 to 40 older regional jets.

In Europe, the long-standing basket case of the industry, Alitalia, is burdened by a large fleet of old MD-80 short-haul jets and is largely unhedged against the soaring oil price. It is only just being kept alive by the drip feed of the latest tranche of state aid.

In Spain, a shake-out is looming among the smaller low cost carriers including Vueling and Clickair, while start-ups in Eastern Europe, such as SkyEurope and Wizz Air, could also prove vulnerable to sharply rising fuel bills.

Elsewhere in Europe increasingly loud distress signals are being sent out by Austrian Airlines and SAS Scandinavian Airlines.

With the crude oil price around $130 a barrel and jet kerosene costing more than $1,200 a ton, the level of fuel consumption per seat and per ton of cargo becomes crucial to survival.

Mr. Spinetta made much on Thursday of Air France-KLM’s fleet renewal program, where the replacement of older four-engined Boeing 747-400 jumbo passenger jets and freighters with twin-engined Boeing 777s is cutting fuel consumption 25 per cent per aircraft. Hedging could only offer only a temporary respite from higher fuel costs, he said. Only fleet renewal could bring long-term relief.

And for even the strongest there will be pain. British Airways last week reported record profits for the year to March and the first 10 per cent operating profit margin in its history.

And yet it also warned that $125 oil could wipe away the entire operating profit this year, without further cost-saving, fare increases, and cuts in capital spending.

Wolfgang Mayrhuber, Lufthansa chief executive, was virtually alone in the global airline industry when he left his financial forecast unchanged on Wednesday and said the German national carrier still expected to match or surpass last year’s record operating earnings in 2008.

Lufthansa is one of the best hedged and most strongly capitalised airlines in the world, and for this year has the one-off advantage of a first 12-month consolidation of Swiss. Lufthansa and Air France have already led the consolidation process in Europe and remain the most likely predators.

Mr. Mayrhuber said ominously that where other airlines were in trouble, Lufthansa would be looking to move in and “harvest” their markets.