U.S. Airline Industry Heading for “Catastrophe” Warns New Study

(Transport Intelligence/CTV News)

Canadian airlines still in “reasonably good shape” however

At current oil prices, several U.S. airlines will default on their obligations to creditors, beginning at the end of 2008 and early 2009, according to a study issued today (June 13) by AirlineForecasts LLC and the Business Travel Coalition (BTC).

According to that report, $130/barrel oil prices would increase yearly airline costs by $30bn, while carriers would be able to generate only $4bn in fare increases and incremental fees. “The implication of this alarming trend is that several large and small airlines will ultimately end up in bankruptcy – and of those, some will be forced to liquidate,” it suggested.

“If oil prices stay anywhere near $130/barrel, all major legacy airlines will be in default on various debt covenants by the end of 2008 or early 2009. U.S. commercial aviation is in full blown crisis and heading toward a catastrophe.

“Airlines are the primary source of inter-city transportation, critical to national and local economic development, the flow of human capital, movement of just-in-time parts for manufacturing, perishable food and other goods critical to our economy. With airlines gravely threatened, so is our economic well-being.”

Specific findings of the AirlineForecasts/BTC study include:

• The top 10 U.S. airlines will spend almost $25bn in higher fuel costs this year over last year when jet fuel averaged $2.11 per gallon. Fuel hedge benefits could offset $5 to $6bn of the increased fuel costs.

• Earnings for the group (of U.S. airlines), when one-time reorganisation charges are removed, were less than $4bn in 2007, the only year of profitability this decade. “The group could lose as much as $9bn over the next 12 months if the current range of oil prices holds.”

• Airlines have the ability to raise some cash, and moreover, suppliers such as aircraft manufacturers, leasing companies and travel management companies will have an incentive to support large airlines that provide a stream of value. “Nevertheless, without a swift reduction in the price of fuel, the industry is headed toward a massive failure that will result in more bankruptcies, including liquidations.”

While there is little doubt the industry is hurting both in Canada and the U.S., Joe D’Cruz, a management professor at the University of Toronto, said Canadian airlines are in “reasonably good shape.”

“In Canada, the industry is insulated by a couple of things,” D’Cruz told CTV.ca, noting that the overall Canadian economy is in better shape than its American counterpart.

“We (also) don’t have the intense (airline) competition. There is competition, but the airlines refrain from destructive competition. (And they) seem to pass on increases in high oil prices to travelers. They are hurting, but they are not in a disastrous shape.” Read more here.