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Fuel Costs Could Bankrupt More Airlines

By DAVID GOLDMAN,

CNNMoney

Posted: 2008-07-16 12:45:54

NEW YORK (July 16) - Thousands of layoffs, hundreds of grounded planes and 21 price increases may not have been enough to save the embattled airline industry from the damaging effects of high fuel prices.

Turbulence in the Skies

Tim Boyle, Getty Images

American Airlines is cutting 200 pilot jobs as part of ongoing efforts to offset the unforeseen sky-high costs of jet fuel. American's pilots union recently received a plan that offers incentives to senior pilots who leave voluntarily.

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According to a report on the nation's top airlines released by Fitch Ratings on Tuesday, record fuel costs and weak cash flow may lead to "multiple bankruptcies and liquidation" for major U.S. airlines in 2009.

"The industry's current structure is unsustainable in the current fuel environment," said William Warlick, a senior director at Fitch and author of the report.

Airlines have attempted to cut costs by reducing capacity, downsizing, and hiking fares and fees, but the moves may not be able to improve their cash flow.

"Schedule-cutting moves announced by all U.S. carriers over the past few months are not sufficient to counter the devastating impact of jet fuel prices," said the report.

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Though many of the major carriers, such as United Airlines, Delta Air Lines and Northwest Airlines only emerged from bankruptcy protection not too long ago - as recently as June 2007 - the report says the current situation may prove to be even more severe than the industry's last financial crisis.

"The current situation ... is a potentially permanent cost shock that cannot be addressed entirely through capacity reduction and downsizing," said Warlick.

Other analysts agreed, saying the airlines' present dilemma cannot be compared to previous industry struggles.

"Jet fuel prices have changed the whole business model, so we don't have any history to draw on here," said Joe Schwieterman, a transportation expert at DePaul University. "We don't know where it all leads."

Crash could come after Labor Day

So far, most of the recent bankruptcies in the industry have been limited to smaller carriers like Aloha Airlines, ATA and Skybus that lacked ample capital to cover losses from fuel costs.

But in the fall, when air travel typically grows lighter, Fitch says the larger airlines may begin to suffer the same fate.

"After Labor Day ... all the U.S. legacy carriers will see a rapid erosion of cash levels that could threaten their survival in 2009 if adverse fuel trends continue," Warlick wrote.

Furthermore, a sustained economic slump could drive even more passengers away, making revenue gains even more difficult to generate for airlines, according to the report.

"It seems implausible that air travel will substantially diminish after seven years of steady growth, but next year we could see a strong downward shock," Schwieterman said.

Fitch said the airlines that will have the most difficult time generating enough revenue to cover rising costs include United, Delta, US Airways, Southwest, and JetBlue.

American Airlines and Continental were listed as "stable."

Not all analysts are sure that bankruptcy is imminent, however.

"At some point, air travel will just have to be 20 percent more expensive," said Schwieterman. "It's not implausible to see the industry in the black. "In the meantime, airlines continue to cut back.

Cutbacks continue

As part of an effort to trim 6,800 jobs, or 8 percent of its work force, American Airlines announced Tuesday it is cutting 200 pilot jobs to cope with higher costs for jet fuel.

"Any pilot reductions are regrettable, but the current economic environment is forcing us to make adjustments throughout the company," said the airline in a statement. "This proposal will help mitigate the unfortunate effects of a reduction in force."

Midwest Airlines, announced Monday it will cut 1,200 jobs, or 40 percent of staff, and it will ground 12 planes by this fall.

Last week, CEOs from 12 of the nation's top airlines sent an open letter to all airline customers, urging lawmakers to curb excessive speculation to scale back record fuel costs.

Airlines say record fuel prices are burdening their business and customers alike. Analysts expect the airlines will cut capacity by 9 percent in 2008 while continuing to hike fees and cut staff.

2008-07-16 11:34:39

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16 comments

Goin2DahDumps 05:20:47 AM Jul 17 2008

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JUST WHAT THE HELL IS GOING ON ???.....THE WHOLE COUNTRY IS FALLING APART, IS THERE ANY LEADER-SHIP ANYMORE ?Sssssshhhhhsssss..., so you think George is good , huh ?, just wait until we get McCain, he's great !!!!

idtheftnarc 12:03:20 AM Jul 17 2008

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The airline pilots and crew, much like other Unions suck all the profit out of the company in high wages and too many benefits.... They don't have to pay for their hotel rooms, food, or cab rides when they aren't flying, and the 3 star hotels they stay at, provide dry cleaning free of charge in addition to room service and a wet bar, if that tells you anything about how much the airlines are paying for Pilots and Stewardesses. The cab rides to and from the airports are covered.. They have great medical, dental, optical, and life insurance, plus 401k... plus free travel anywhere in the world... plus discounts... plus pension... and then they are payed extremely well in salary... The problem, just like automotive companies is it's worker's union being too greedy

Thrmshield 04:42:54 PM Jul 16 2008

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Airlines must be the only industry on earth to not cover thier costs in their prices. Travel will not cease in the U.S. The first airline to realize they are the cheapest mode of trasnportaion for travel over 500 miles, will do real well in the future.

RONTRT 04:38:47 PM Jul 16 2008

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The Airlines have it exactly wrong ...rather than charge for checking a bag, they should charge extra to carry it on board. Why pay extra for the INCONVENIENCE of checked baggage....the wait, the uncertainty of actually getting it etc Carrying baggage on the plane slows everyone down and must be costly in terms of the extra time to load the plane , with limited overhead storage .As for the price of air travel, it is far too cheap ...regardless of the price of fuel . If we paid a bit more ,maybe we would get some reasonable service and some room.

LEOLAPETEE 04:37:50 PM Jul 16 2008

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I would like to see all domestic airlines go out of business and replaced by bullet trains

RyanCJ3 04:27:56 PM Jul 16 2008

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UNFORTUNATELY THERE ARE TOO MANY PLAYERS IN THE GAME AND THEY ARE ALL CHASING THE SAME DOLLARS. YOU CAN'T BLAME THIS ALL ON THE RISING COST OF FUEL. ITS THE EASIEST EXCUSE BUT NOT SO KIMOSABE - A LOT OF BAD MANAGEMENT AND ORGANIZATIONAL DECISION HAVE BEEN MADE BY SOME OF THESE PLAYERS TO TAKE THE EASY WAY OUT ALL ALONG.

KHOD3 04:14:56 PM Jul 16 2008

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As someone who worked for the Bush connected company that got the first no-bid contract to set up the whole TSA and looted the taxpayers after the fraud 911 "attack" I hate flying. "Orange alert!! That's for citrus! Give me a break! I have to pretend to look for Bin Laden in my shoes? He's in Pakistan who we send a billion dollars per year to keep him warm on cozy-ISI funded through CIA money. Bin Laden was in Dubai in July of 2001 at an American hospital meeting all his numerous relatives and the CIA bureau chief according Le Figaro, the Leading Fench Newpaper and CBS tracked him down to Pakistan on 911 but that sure got shut up. Scam! They needed to break unions, go for the last best oil pool in Iraq and institute a police state here to cover the horrible economic situation they have gotten us into. Every man women and child owes about half a million buckeroos in debt and fiscal obligations so good luck! I expect a nuclear bomb to go off to cover that up. Cheney has his man

AdoFilli 03:50:16 PM Jul 16 2008

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You dems are stupd --as transparent as glass--when did this all start? less then 2years ago--About the time the dems. to over congress--thinking they could make George look bad!!!Well they trip and fell back in it-----