Airlines in crisis as fuel costs soar

Marriage of convenience? Delta boss Doug Steenland and Richard Anderson of Northwest shake hands on their merger in New York on Tuesday

James Doran|In New York

11 April 2012

Do you remember when traveling by air had cachet, mystique and class? When a glamorous attendant greeted you with a flute of champagne and a smile that promised so much more?

Don't worry if you can't because the days of such luxurious air travel - at least at the back of the cabin - are long in the past. More troubling, though, is that airline profits, in the West at least, are an equally distant memory.

It seems it is impossible to make money running an airline in America or Europe these days. Bankruptcies abound; fleets belonging to carriers that were once industry leaders are literally falling apart at the seams; and costs are soaring to stratospheric heights.

Not even the merger announced earlier this week between Delta Airlines and Northwest Airlines, two of the world leading carriers, could inspire share prices of their competitors out of the doldrums.

As with most economic woes today, the biggest culprit in the airline mess is the price of oil. If you think it is getting too costly to keep your car topped up with petrol, imagine filling a 500-strong fleet of 747s with jet fuel. US analysts reckon every cent on the cost of a gallon of jet fuel adds about $195 million in operating expenses across the global airlines industry - or $25 million (£12.5 million) per penny per litre. Indeed, American Airlines revealed earlier this week that it spent more than $2.1 billion on jet fuel in the first three months of the year alone, an increase of more than 45% on the same period last year. The actual cost of jet fuel for three-month delivery in New York is up 79% on the same month last year.

Needless to say AMR, American's parent, reported a first-quarter loss of $328 million, its biggest since 2005. And AMR is not alone. Analysts reckon the biggest US carriers will show a combined first-quarter loss of more than $1.4 billion.

Fuel, though, isn't the only increasing overhead weighing on the world's biggest airlines. Keeping abreast of regular maintenance checks and complying with necessarily strict regulatory oversight for safety represents another rising cost.

Now, I'm not normally a nervous flyer, but when I'm 39,000 feet above the Atlantic Ocean in an AA jet and I read that the carrier's entire f leet of MD 80s has been grounded because an FAA inspector spotted bunches of wires literally hanging out of the fuselage, the knuckles tend to whiten a bit.

Putting thousands of flights out of commission to check and repair a fleet of 300 regional jets has hit AA hard. But it is not the only carrier to fall under the FAA's watchful gaze. All airlines will doubtless be redoubling their maintenance checks to ensure they don't fall foul of the inspectors.

Saddled with these and other soaring costs the airlines have to hope that passenger numbers will not only be maintained in the coming years, but that they will increase markedly if they are to make a profit once again.

But the signs are not good. The International Air Transport Association, IATA, an airline industry group, revealed just last week that load factors are on the decline and that growth in revenue per passenger mile, the benchmark indicator of the airlines' fortunes, is starting to slow dramatically. The ratio of seats carrying passengers to empty seats fell in every region of the world by the latest count, with Europe the hardest hit, while the number of miles travelled per passenger is growing at a rate less than half that to which the industry has become accustomed.

The once-lucrative transatlantic route is one of the worst performers by almost every measure with growth slowing to a near standstill.

All of this bad news - and more, such as the disastrous opening of Heathrow's Terminal 5 - has overshadowed the advent of Open Skies, an agreement the industry has battled for decades to implement. It seems sad that the deal, which cuts limits on which airlines can fly on transatlantic routes, should arrive "a day late and a dollar short", as they say in the States. In other words, the treaty is too little too late to save the industry from its malaise.

Assuming the price of oil, and in turn the price of jet fuel, isn't going to come down any time soon and that the economic climate isn't going to improve to such an extent that Brits and Americans are going to start booking flights in record numbers, there are but two alternatives to cure the airline industry's ills - bankruptcy or consolidation.

UAL, the parent of United Airlines, has been after Continental Airlines for ages, while AMR has been rumoured to be preparing a counter-bid for Northwest or indeed an offer for Continental.

But, as was the case for Delta and Northwest, deals among airlines move at a glacial pace, meaning almost inevitably more carriers will be going bust - perhaps a big one - before the industry can soar above the turbulence to profitability.

Maybe then transatlantic flyers will once again hear that most welcome of phrases while speeding through the clouds: "May I get you some more champagne?" For now, with the credit crunch still unfolding, no-one is ready to uncork the bubbly.

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