Fuel Prices Pressure Airlines To Cut Capacity; Shares Plunge
May 21, 2008 Market Outlook
Fuel Prices Pressure Airlines To Cut Capacity; Shares Plunge
Last Update: 5/21/2008 5:51:31 PM
By Ann Keeton
Of DOW JONES NEWSWIRES
The dramatic impact that fuel prices are having on U.S. airlines came into
sharper focus Wednesday as the world’s largest airline slashed its flight
schedule and shares for several carriers plunged to multi-year lows.
With jet fuel prices up more than 50% versus a year ago and still rising, and the
outlook for passenger traffic deteriorating amid an economic slowdown, U.S.
airlines have little choice but to cut capacity and raise fees for passengers.
Airlines appear to have enough cash on their balance sheets to survive this year,
but maybe not in 2009 if the operating environment continues to deteriorate,
according to industry analysts.
American Airlines, a unit of AMR Corp. (AMR), took the most aggressive steps yet
among major carriers in announcing Wednesday it would trim its domestic flight
schedule by as much as 12% in the fourth quarter, a move that will result in
facilities being closed and thousands of jobs lost. At the same time, American
became the first carrier to charge some customers for any checked luggage, as
part of an array of service fees.
AMR Chief Executive Gerard Arpey said the airline industry wasn’t built to
withstand oil prices at current levels, especially when coupled with a weak U.S.
economy. “Our company and industry simply cannot afford to sit by hoping for
industry and market conditions to improve,” he said.
It’s far from certain that the latest steps by AMR - which last week received a
waiver from lenders on a covenant for credit facilities totaling $625 million -
will be enough to stabilize its fragile financial situation. Arpey said that the
company will act further on capacity if conditions warrant.
AMR’s decision to take a big capacity cut “is a good step, but it’s probably half
of what’s needed, and other carriers haven’t matched it,” said industry
consultant Robert Mann. “It’s not clear what other airlines intend to do,” he
added.
AMR shares hit their lowest level in five years on Thursday, falling 24% to close
at $6.22, amid news that crude oil hit another record of $133 per barrel and the
outlook for U.S. economic growth worsened.
Shares of United Airlines parent UAL Corp. (UAUA), which also recently received a
waiver on debt covenants, tumbled 24% to $8.15, its lowest level since the
company emerged from bankruptcy in early 2006. Shares of US Airways Group (LCC)
fell 22% to $5.35, a five-year low.
Consolidation Mania May Fade
Analyst Jamie Baker at JPMorgan said in a report this week that the industry will
pay $17.2 billion more for fuel this year than in 2007. While U.S. airlines
reported a profit of $6.6 billion last year, high fuel prices could result in a
loss of $7.2 billion this year, followed by a loss of $8.1 billion in 2009.
Airlines most at risk for bankruptcy, based on current liquidity and borrowing
ability, are US Airways, United and Northwest Airlines Corp. (NWA), according to
Baker.
Airlines have increased their fuel efficiency in recent years, and they have
worked hard to cut non-fuel costs. For the first time, this year they have
trimmed domestic seat capacity, eliminating unprofitable routes.
Yet analysts have said that, for the industry to post profits in 2008 domestic
capacity needs to come down by as much as 20%. Until this week, industry-wide
capacity cuts for 2008, mostly to be implemented after the busy summer travel
season, amounted to about 2%.
Earlier this year, industry watchers were touting mergers as a way to bring
capacity down. But a recent merger plan between Northwest and Delta Air Lines
Inc. (DAL), the only deal now on the table, includes no plans to downsize a new
airline that would be formed by the end of this year.
“Industry consolidation would be the best way to cut capacity, but mergers are
costly and time-consuming,” said analyst Ray Neidl at Calyon Securities. “The
high price of oil now may put an end to the airline merger mania that we saw
earlier this year,” he said.
Neidl, who is currently revising his earnings expectations for the industry in
light of the rise in oil prices, said he expects U.S. airline seat capacity to
come down, whether by voluntary reduction or the liquidation of some struggling
airlines.
Fares, Fees Not Offsetting Fuel
On the revenue side, airlines have increased ticket prices a number of times this
year, and most have implemented new fees for services ranging from changing
reservations to checking bags.
But that has done little to offset the cost of fuel. According to the Air
Transport Association, the U.S. industry trade group, between 2000 and the first
quarter of 2008 jet fuel prices rose 217%, while domestic air fares dropped 0.5%.
Competition from low-cost airlines, led by Southwest Airlines Co. (LUV), has
forced full-fare airlines to match low prices. Through a long industry downturn
early in the decade, Southwest was adept at hedging its fuel costs, remaining
profitable as most other carriers went bankrupt. Southwest still has a strong
hedging program, although the airline faces greater headwinds than in the past.
Possibly Related Posts:
- Depression? Oversold? Just the beginning? Close to the end? You will find zero guidance from quality analysts.
- A List of ETFs You Should Know In Stock Market
- Florida pension fund loses a quarter its value
- Good bye to U.S dollar. Say hello to Gold and Amero
- S&P 500 losses nearly $1 trillion more than 2000-02
![[del.icio.us]](http://images.del.icio.us/static/img/delicious.small.gif "\\"){kind=small}
Tags: Aggressive Steps, Airline Industry, American Airlines, Amr, Amr Corp, Balance Sheets, Domestic Flight Schedule, Dow Jones, Dramatic Impact, Economic Slowdown, Financial Situation, Gerard Arpey, Industry Analysts, Industry Consultant, Jet Fuel Prices, Lows, Oil Prices, Operating Environment, Passenger Traffic, Pressure Airlines
Leave a Reply