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Sunday, 8 June 2008

Fewer, pricier flights and job cuts: airlines' response to oil prices

PARIS - AS oil prices soar, airlines are coming back down to earth with a bump - cutting routes and capacity, ramping up prices and axing jobs as bosses freely admit the industry is in the 'worst crisis since 9/11.'

Oil prices on Friday broke through the US$139-a-barrel (S$190) level for the first time in New York and US$138 in London, powered by a wilting dollar.

A weakening US currency lowers the cost of dollar-priced goods, such as oil, for foreign buyers and drives up demand.

With sober analysts such as Goldman Sachs suggesting the price could reach US$200 a barrel within two years, the aviation industry appears to be in a nose-dive.

Airlines are particularly susceptible to hikes in the oil price, as jet fuel makes up a substantial part of their operating costs.

For customers, already facing escalating food prices, and, at least in Europe, rising inflation and higher interest rates thanks to a credit-crunch, the effect is likely to be steep rises in ticket prices.

'The industry needs to raise average fares 15 per cent to 25 per cent to be profitable with crude at US$125,' according to an analysis by Credit Suisse.

'As one carrier raises fares, we feel comfortable others will follow,' it warned.

So far US airlines are taking the brunt of the hit. Continental Airlines said on Thursday it would cull 3,000 jobs and ground 67 aging planes in a massive retrenchment due to the price of fuel.

'The airline industry is in a crisis. Its business model does not work with the current price of fuel and the existing level of capacity in the marketplace,' Continental's chairman and chief executive Larry Kellner and president Jeff Smisek said in a statement this week.

'The industry faces its worst crisis since 9/11,' the pair wrote in a letter to employees.

Continental's cuts on Thursday came a day after United Airlines's parent company, UAL, announced it was removing 100 aircraft and cutting up to 1,100 jobs.

Two weeks earlier, AMR, the parent company of US market leader American Airlines, announced big cuts in domestic flights, shed workers and raised some fees for passengers.

So far this year the industry has eliminated nearly 22,000 jobs, compared with 21,710 for the whole of 2007, according to global outplacement firm Challenger, Gray and Christmas.

Where the US leads, others follow, from Australia to east Asia to the low-cost budget airlines that have opened up so many routes for holiday-makers in Europe.

Dublin-based no-frills airline Ryanair said this week it had taken a 10.3 per cent hit in net profits for 2007-2008 and would break even next year - but predicted other low-cost carriers would go to the wall.

'The airlines who will survive this period of higher oil prices and industry turndown are those with cheaper fuel efficient aircraft, lower costs, substantial cash balances, low net debt and management who are ready to exploit downturns to drive costs lower and increase efficiency,' Chief Executive Michael O'Leary said on Tuesday.

The famously combative CEO also announced Ryanair would ground up to 10 per cent of its fleet this winter and increase fares by an average of five per cent.

Silverjet, the British no-frills business-class carrier, went into administration at the end of May.

'Several airlines in Europe will go out of business,' the head of the German unit of Britain's Easyjet, John Kohlsaat, told German daily Der Tagesspiegel last week.

'Theoretically, 50 are endangered,' he added.

According to the International Air Transport Association (IATA), 24 airlines have gone bust in the past six months, with its member companies facing potential losses of US$6.1 billion this year if oil remained around US$135 per barrel.

'The industry is in crisis, perhaps the biggest crisis we have ever faced,' IATA Secretary General Giovanni Bisignani told its annual conference in Istanbul last week.

At the same conference the head of Malaysia Airlines said his company would freeze recruitment and consider axing more routes as part of cost-cutting plans.

Australia's Qantas will cut several of its Asia flights, while two major Chinese airlines, China Southern Airlines and China Eastern Airlines, have announced temporary reductions in their international routes.

Although more fuel-efficient aircraft are in the pipeline - a new Airbus consumes 20 per cent less fuel than old Boeing 737, according to Easyjet's Kohlsaat - many airlines and their passengers need to brace for an emergency landing. -- AFP

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