Oil, the economy and airlines

The numbers don’t look good for the the airlines this summer, I’m afraid. Small trickles of data keep coming in from every direction pointing to a toxic combination of high oil prices and low demand that are going to be serious hurdles for the industry as the year progresses. Predicting more bankruptcies, Morningstar recently ranked the top carriers by liquidity and debt coverage, highlighting the struggling US Airways and Frontier Airlines at the back of the pack while pointing out the very few who might have a chance. The IATA keeps adjusting its annual industry profits as crude rises, from +4.5bn when a barrel of oil was 86$ to -2.3bn when it was 106$ (the current price is around 130$).

At the same time, carriers have been forced to launch fare sales across the board because demand is so low that they can’t fill airplanes. So even when flights sell out, they’re still losing money.

In the past six months alone, we’ve written about seven airlines that have gone under, Skybus, Aloha, ATA, Eos, Silverjet, Maxjet and Oasis Hong Kong, with Frontier Airlines going bankrupt but continuing operations. There are seventeen others that we didn’t mention.

Each airline eulogizes its tenure with a farewell note left on an abandoned webpage, most pointing to the rising price of jet fuel and recalling a long lost day when their company meant to change the world.

How can the airline industry continue to operate in these conditions? Their current business plan is to make some of it up by adding extra fees — 15$ here for a checked bag, 50$ there for a changed ticket. But Americans are crafty. They’ll do whatever they can to get around extra fees, from cramming everything into an overhead compartment to starving to death on a transcontinental flight. And in the end the few dollars made by selling stale sandwiches on their flight won’t make up for the extra price of jet fuel in the belly of the aircraft.

So the industry will continue to take hits and the price of oil will continue to rise. Meanwhile, consumers will continue to demand low cost tickets, tapering off demand and cutting into the bottom line. Capacity will need to be reduced severely to maintain cash flow. Some, like American Airlines parent company, AMR have already initiated these efforts, announcing a 12% cut in capacity just last week.

And what if they’ve squeezed every last nickel out of the consumer, cut as many corners as possible and still can’t afford to run the airline? Run the well dry and hope that things get better before anyone notices. Only once their credit has turned tepid and the feds have shuttered their gates will they cease operations, stranding thousands of passengers and leaving only a website and a few dusty old MD-80’s in an airline empire that never could have been.