A study published jointly by AirlineForecasts LLC and the Business Travel Coalition predicts the major U.S. could be in bankruptcy by early next year if fuel prices don’t fall quickly.
The study shows that $130/barrel oil prices will increase yearly airline costs by $30 billion, while airlines will be able to generate only $4 billion in fare increases and incremental fees.
Among the findings of the study:
– The top 10 U.S. airlines will spend almost $25 billion in higher fuel costs this year over last year when jet fuel averaged $2.11 per gallon. Fuel hedge benefits could offset $5 to $6 billion of the increased fuel costs.
– Earnings for the group, when one-time reorganization charges are removed, were less than $4 billion in 2007, the only year of profitability this decade. The group could lose as much as $9 billion over the next 12 months if the current range of oil prices holds.
– Industry fares will have to increase at least 20%
– across the board and on average – just to cover the dramatic gap-up in fuel costs from 2007. This is not possible given the level of uneconomic seat capacity in the system today.
– The upshot of higher fares is less traffic, and given a reasonable estimate of price elasticity, the industry will eventually be forced to shrink its seat capacity by 15% to 20%. However, there is no guarantee that a transition to a smaller, more expensive (for the consumer) airline industry would be successful and sustainable.
– Airlines have the ability to raise some cash, and moreover, suppliers such as aircraft manufacturers, leasing companies and travel management companies will have an incentive to support large airlines that provide a stream of value. Nevertheless, without a swift reduction in the price of fuel, the industry is headed toward a massive failure that will result in more bankruptcies, including liquidations. (source)
For a full copy of the study, visit http://tinyurl.com/6qhh99 .
