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Oil Surge Sinks Airlines Deeper In Debt

US Airways ditches pretzels, American adds baggage charge

By Truman Lewis
ConsumerAffairs.Com

June 2, 2008

The International Air Transport Association (IATA) has revised its industry financial forecast for 2008 sharply lower, now projecting a loss for the industry of $2.3 billion.

But in fact, the picture may be even bleaker. The forecast uses a consensus oil price of $106.5 per barrel crude. But oil prices haven't been that low in several weeks. The price hit $135 a barrel in late May, before retreating slightly.

"For every dollar that the price of fuel increases, our costs go up by $1.6 billion," said Giovanni Bisignani, IATA Director General and CEO. The industry's total fuel bill in 2008 is expected to be $176 billion, accounting for 34 percent of operating costs. This is $40 billion more than the 2006 bill, which was $136 billion In 2002, the bill was $40 billion, equal to 13 percent of costs.

"We also need to take a reality check. Despite the consensus of experts on the oil price, today's oil prices make the $2.3 billion loss look optimistic," said Bisignani. For every dollar that the oil price increases, we add $1.6 billion to costs. If we see $135 oil for the rest of the year, losses could be $6.1 billion."

Bisignani tends to be more pessimistic than optimistic, noting the situation has changed dramatically in recent weeks. Oil skyrocketing above US$130 per barrel, bringing the industry into what he calls "uncharted territory." Add in the weakening global economy, he says, and you have yet another perfect storm."

"Oil is changing everything," said Bisignani. "There are no easy answers."

He notes than in the last six years, airlines improved fuel efficiency by 19 percent and reduced non-fuel unit costs by 18 percent. There is no fat left, he says.

Airline passengers have begun paying some of these extra costs in the form of additional fees for baggage and other services, but the other shoe may not have yet dropped. The CEO of Delta Airlines has said his company needs to increase air fares by 20 percent, just to stay even with fuel costs.

Silverjet, pretzels

U.K.-based Silverjet PLC had been operating flights from London's Luton Airport to New York and Dubai but failed to secure an emergency cash injection from a United Arab Emirates investor and shut down its operations Friday. Silverjet said it is still seeking additional funding but hasn't reached any agreement.

Meanwhile, US Airways stopped serving free pretzels yesterday. But airline spokesman Phil Gee said economy-class passengers will still be offered complimentary non-alcoholic beverages on all routes. He said the carrier would also stop serving Biscoff cookies during early morning flights, although passengers can still expect to receive free hot beverages.

Last month, American Airlines became the first U.S. carrier to tack on a service charge for the first bag passengers check. The $15 fee, which starts June 15, will help offset higher fuel costs, the airline said.

American said it would also raise other fees for services ranging from reservation help to oversized bags. The other fees will mostly range from $5 to $50 per service.

American also said it would reduce domestic passenger capacity by 11 to 12 percent in the fourth quarter of 2008, retiring at least 75 mainline and regional aircraft. American said the cuts are unavoidable.

Air Midwest, Aloha Airlines, ATA and Skybus all suspended operations within the last two months. Frontier filed for bankruptcy but continued operating.

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