With soaring jet-fuel prices and a weak economy battering prospects for airline profitability, the industry may be facing more bankruptcies and mergers, analysts told an aviation economics and finance conference in Broomfield on Tuesday.
“The ultimate challenge we’re looking at is recession and $120 (per barrel) oil prices,” UBS Securities airline analyst Kevin Crissey told the national meeting sponsored by Airports Council International, a group that represents U.S. airports.
Crissey told airport executives at the Omni Interlocken Resort that “the rise in fuel prices this year is costing American Airlines $1 million an hour.”
The top 10 airlines face a $12 billion annual fuel expense, leading to a condition in which “the weaker go bankrupt” and there are “big losses at large carriers,” he said.
The slowing U.S. economy and “ongoing tumult in the airline industry” mean U.S. airports face “daunting credit challenges,” said Kurt Krummenacker, analyst with Moody’s Investors Service.
Krummenacker and his Moody’s colleague, Bart Oosterveld, explored three “risk scenarios” for U.S. airports.
The best case would be marked by reduced air-travel demand, airline consolidation and reduced airline seat capacity, Krummenacker said.
A more severe scenario would see passenger boardings decline 5 to 10 percent and a market in which some low-cost carriers cease operations or find a way to consolidate, he said.
Under the worst-case scenario, carrier contraction would lead airports to reconsider their capital expansion programs, he said.
The airline industry has long been beset by economic cycles, but historically high fuel prices are making the current downturn different, said Kevin Neels, an aviation analyst with The Brattle Group in Cambridge, Mass.
In the past, low-cost carriers have had advantages over “legacy” airlines such as American, United and Delta, but expensive oil has narrowed the cost differential, Neels told airport officials. “Now, low-cost carriers feel the hit.”
High oil prices could change another industry dynamic, he said.
In previous downturns, major carriers often disposed of their oldest and least-efficient planes, only to see the aircraft picked up by new-entrant airlines.
That model may not hold now, Neels said.
“High fuel prices increase the cost differential between old and new planes and accelerate the retirement of gas guzzlers,” he said, adding that fuel up to $130 a barrel means “fewer airline entrepreneurs.”
Jeffrey Leib: 303-954-1645 or jleib@denverpost.com
