FOR AN industry that relies on thrust and lift, the ongoing difficulties of the financial system and the prospect of a widespread recession are reasons to worry. The skies look black indeed for many airlines. So far in 2008 over 30 carriers around the world have seen their planes take off for the last time; by various estimates another 30 bankruptcies will follow this year. For survivors, however, fortunes might be getting brighter.
Bankruptcies and losses are hardly worthy of celebration. But on Tuesday United Airlines saw its share price leap by nearly 9 percent, after the airline announced smaller than expected quarterly losses. Last week Delta, American and Continental, some of America’s biggest carriers, said losses for the third quarter had totalled around $650m. Southwest, a low-cost carrier that has remained consistently profitable for years, also said that it has made a loss of $247m in the three months to September. Given airlines’ condition earlier this year, this is some reason to cheer. The twin threats of rising costs and sagging demand had seemed to put the survival of many big airlines in question. In the second quarter seven of America’s biggest airlines made a combined loss of $5.9 billion.
Spiralling fuel prices helped to finish off smaller airlines such as Zoom, Oasis and most recently LTE, a Spanish low-cost carrier. Passengers grumbled as they were forced to pay fuel surcharges. Carriers also responded by cutting capacity: around the world 46m airline seats have been chopped from schedules according to the Official Airline Guide. American airlines have cut almost 11 percent of internal flights in the fourth quarter, compared with a year ago. In the European Union there will be 83,000 fewer flights over the same period.
The airlines’ quick decision to cut capacity coincided with one of the happier side-effects of looming economic grief. Fuel, by far the biggest cost for airlines, has plunged in price. Oil, which fetched nearly $147 a barrel in July is now hovering around $70. British Airways, Lufthansa, Singapore Airlines and others have begun to cut fuel surcharges.
The rapid decline in the oil price has caught some airlines unawares. Firms such as Southwest and United, which took care to hedge against rising fuel costs, have had to take big charges against the declining book value of fuel-derivative contracts in the latest quarter. Nor is there any sign that airlines are ready to relax other strategies to raise revenue that were introduced to boost cash reserves. In America and elsewhere additional charges for baggage, in-flight meals, drinks and entertainment look set to stay.
At the beginning of September the International Air Transport Association (IATA), the industry’s trade body, issued a forecast that the world’s airlines would lose $5.2 billion in total this year after a rare spell of healthy profits last year. In addition IATA predicted losses for 2009 of $4.1 billion. Since then both Morgan Stanley and Credit Suisse have predicted that the industry might even return slender profits next year.
Europe’s budget airlines are also hopeful that the economic turmoil could come with a silver lining. As companies and individuals pare spending, budget firms may pick up passengers who are looking for a bargain. And the falling oil price is a bigger boon for low-cost carriers, as fuel accounts for a greater proportion of costs. Ryanair’s bullish boss, Michael O’ Leary, estimates that the industry’s travails might assist him in plans to launch a low-cost transatlantic service in the next couple of years. A new long-haul fleet might be assembled cheaply as rivals collapse or cancel orders.
Boeing and Airbus have record order books partly because airlines had been desperate to replace older fuel-guzzling planes to maintain profits when oil was painfully expensive. The planemakers say that their customers have the financing in place to pay for most orders for next year, but demand could wane after that. Both may have to reduce production to avoid the prospect of plunging plane prices.
The future for most airlines is looking less gloomy than it did a couple of months ago. But the glimmer of hope provided by recession-proofing and falling oil prices will be snuffed out if the economic downturn proves to be as prolonged and nasty as the gathering clouds might suggest.