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Combination of forces to result in sharp losses for airlines

Airlines, which saw glimmers of improvement in April, are grappling with the toughest financial squeeze since the Sept. 11 terror attacks.

Airlines, which saw glimmers of improvement in April, are grappling with the toughest financial squeeze since the Sept. 11 terror attacks.

A collision of rising fuel prices, a sharp decline in travel, discounted fares, swine flu, and a global recession will cause airlines worldwide to lose $9 billion this year.

Just three months ago, the International Air Transport Association projected those losses to be $4.7 billion.

"The ground has shifted. Our industry has been shaken. This is the most difficult situation that the industry has faced," Giovanni Bisignani, head of IATA, told the group's annual meeting yesterday in Malaysia.

After the 2001 attacks, global airline revenue fell 7 percent, and it took three years to recover "even on the back of a strong economy," Bisignani said.

This time, revenue is expected to fall by 15 percent, or $80 billion, and the global industry will not recover any time soon, he said.

Aviation consultant Robert W. Mann said most of the additional losses will be overseas, not among U.S. carriers, which slashed routes and restructured last year when jet fuel prices soared.

Foreign carriers did not restructure, Mann said. In addition, international airlines purchase jet fuel in U.S. dollars. And the currency exchange rate of the dollar has stabilized compared with a year ago.

"All those carriers are now paying much closer to the real adjusted cost of fuel," said Mann, of R.W. Mann & Co. in Port Washington, N.Y. "What you are seeing is a mostly offshore phenomenon. The additional red ink is mostly offshore."

North American airlines are expected to lose $1 billion in 2009 - a narrower loss than the $5.1 billion last year, the trade group said.

Asia-Pacific will be the hardest hit due to a sharp slowdown in three key markets - Japan, China and India. Middle East carriers, despite strong traffic growth, will see losses deepen to $1.5 billion as the region's intercontinental hubs are vulnerable to recessionary impacts in Europe and Asia.

U.S. airlines have scrambled to cut capacity - flights and frequencies - by swapping big planes for smaller aircraft, and parking planes.

Southwest Airlines Co., the largest low-fare carrier, said May 20 that it will further reduce capacity. The airline will cut seats by 6 percent this year, deeper than its previous target of 5 percent.

US Airways, the region's dominant airline, said it would cut domestic mainline seat capacity 8 percent to 10 percent this year, but systemwide only 4 percent to 6 percent, including international and express flying.

After a fall-off in lucrative business and first-class travel over the winter, U.S. carriers reported signs of improvement in April. Passenger volume and revenue stabilized, and even improved slightly from March.

But May brought double-digit revenue declines because of higher fuel and steep fare discounts that airlines offered to fill coach seats, which did not offset the slump in travel.

The swine flu outbreak in early May added to the problems. US Airways estimated it lost $20 million in reduced flights to Mexico in May. Continental Airlines said the H1N1 virus accounted for a $30 million revenue drop.

Just as carriers were hoping to come out of a tailspin, oil prices began increasing. Jet fuel tends to track crude oil prices, which have climbed to about $68 a barrel, after falling to about $34 in December.

With credit tight, more carriers have deferred, or canceled, plane orders. Airbus SAS and Boeing Co. deliveries could fall 30 percent in the next year, the IATA trade group said.

One positive sign: United Airlines said last week that it has asked Airbus and Boeing for bids for up to 150 new airplanes to replace its widebody fleet.

CEO Glenn Tilton told employees in an e-mail Thursday that an order could be placed as early as the fall. Financing would have to be arranged with the manufacturer in a way not to hurt United's balance sheet or cash position, he said.

"We will not invest in aircraft until we believe we can generate a return on our investment," Tilton said. "The analysis we have conducted for more than a year suggests that time may be now."