The recent dramatic increase in oil prices has created a looming catastrophe for the airline industry that could result in the liquidation of major carriers, according to a leading industry observer.
But one industry analyst said the report may be too dire.
“Airlines are paying about twice as much for fuel as they were just a year ago, and roughly four times as much as in 2000,” a new report from the Business Travel Coalition said.
Carriers are scrambling to raise fares and fees as a way to compensate, but “what makes this race an uphill climb is that oil prices continue to rise to previously unthinkable levels — and pushing air travel far beyond affordability for the vast majority of the traveling public,” the report added. “Multiple U.S. airlines are poised to lose the race for survival, some perhaps before the end of 2008.”
On Friday, the price of oil rose $2.69 to close at $134.62 a barrel on the New York Mercantile Exchange.
Congress must be alerted to the magnitude of the airline industry’s problems and the economic fallout that would result from the failure of one or more major carriers, said Business Travel Coalition chairman Kevin Mitchell, whose group represents the interests of business travelers.
Airlines collectively have been able to raise prices by about $3 billion annually in recent years, but that gain now is being overwhelmed by an industrywide annual fuel-cost increase of $25 billion — only $6 billion of which has been ameliorated by hedging, Mitchell said.
After “turning the emergency sirens on,” legislators and others must take measures to “stabilize the patient, help airlines’ bottom lines” and “get carriers through the winter,” he said.
Airline industry expert Robert Mann said the travel coalition’s vision of the future may be a bit too apocalyptic.
The fuel-price crisis “is serious” but it was “not unforeseeable,” said Mann, whose firm, R.W. Mann & Co. of Port Washington, N.Y., performs industry analysis and consulting.
Carriers have had the option of hedging against fuel-price spikes for years, yet most, with the exception of Southwest Airlines, “either were not smart enough or did not care enough” to do so, Mann said. Still, major carriers probably have enough cash to keep going “if they stop the bleeding.”
To do that, airlines must “cut out flying that does not make sense,” Mann added, which they will begin to do after Labor Day when carriers pare less-productive routes from their schedules.
In addition, fuel-cost surcharges and other fare increases are likely to ground “whole classes of customers” that airlines can no longer support with budget fares, Mann said.
Network airlines may have to “walk away from huge segments of the population” to concentrate on “relatively high-fare business travelers” and those who have to fly because of a personal emergency, he said. It will be a “less populist industry.”
Jeffrey Leib: 303-954-1645 or jleib@denverpost.com
The high cost of flying
$3 billion annually: Amount airlines collectively have been able to raise their prices in recent years
$25 billion: Industrywide annual increase in fuel cost
