Oil Prices Fuel Losses

21st Apr 2005

American Airlines, Continental Airlines and Delta all posted steep quarterly losses this week as record fuel prices continue to outweigh efforts to cut costs and raise fares. It’s a familiar story to airlines around the world and whilst they have many difficult issues to contend with, there is no escaping the fact that fuel bills will shape the future of the industry. Urgent action is required and Breaking Travel News looks at what needs to be done.“The high price of fuel is robbing our profitability,” said Giovanni Bisignani, Director General and CEO of the International Air Transport Association at the opening of the AirFinance conference in New York earlier this month. “The fuel bill has risen from US$44 billion in 2003, US$63 billion last year. If oil averages at US$43 per barrel for 2005, the bill will be US$76 billion. And that would leave us with an industry loss of US$5.5 billion for 2005 and over US$40 billion for the period 2001-2005,” said Bisignani.

“We have lost our balance as an industry. Change is critical,” added Bisignani and he went on to emphasise the role that each stakeholder must play. He outlined a vision for change that involves airlines, governments and the industry’s monopoly suppliers—airports and air navigation service providers.

“Everybody has a role to play. Airlines must Simplify the Business by eliminating complex processes that are expensive but add no value to our customer. Industry-wide e-ticketing alone will save US$3 billion in costs each year. Our monopoly partners—airports and air navigation service providers—cost us US$40 billion a year. They must understand the need for gains in cost efficiency and deliver measurable results,” said Bisignani.

He focused the remainder of his speech for the world’s governments, who regularly apply “nationalistic rules for businesses that compete globally”, using taxes and charges to milk profits from airlines. He challenged them to take a different approach, applying modern rules and allowing industrial freedom. “The livelihood of 28 million people in aviation and aviation related activities and US$1.8 trillion of economic activity are at stake. Governments must act quickly in areas that are their responsibility and then get out of the way. We need to get on with business,” concluded Bisignani.

But can we really expect such dramatic change in such an enormous industry? Governments are unlikely to relinquish tax benefits and oil prices seem unlikely to fall. In response to the American Airlines and Continental postings, Chris Lozier, an analyst at Morningstar was quoted as saying “The common lesson is that these airlines should not expect fuel to come down or yields to come up, so the name of the game is and will continue to be low operating costs,” He suggested that American Airlines had been particularly successful in lowering costs. Indeed shares in both Continental and American have risen as their losses actually fell short of analysts’ forecasts.


The management are doing what they can. Airlines have been aggressively restructured to offset higher fuel prices, but their attempts have still fallen short. Airlines have moved to squeeze more seats onto some aircraft and cut domestic capacity, for example.

“Today’s financial results clearly are disappointing,” said Gerald
Grinstein, Delta’s chief executive officer on Thursday. “Record-breaking fuel prices
are masking the many crucial, large-scale, core initiatives our airline
implemented during the quarter. The issue is simple: including fuel, Delta
is not on plan, but excluding fuel, we are better than plan. Also, as
competitive and cost pressures—including fuel—continue to grow, we
are aggressively pursuing opportunities to further reduce our cost
structure and also maintain liquidity levels.”

“We are starting to see those changes bear fruit in our revenue performance,” AMR Chief Executive Gerard Arpey said in a statement. “Regrettably, that silver lining does not come close to offsetting the impact of oil at 50-plus dollars a barrel.”

Continental have come to new labour agreement during the last twelve months which have helped them to further reduce costs. “While we lost money in the first quarter, I appreciate the commitment shown by my co-workers who took painful yet necessary action to quickly ratify new agreements,” said Chairman and Chief Executive Officer Larry Kellner. “Even though we still have more work to do, we have made significant progress to move our company closer to profitability.”

But there really is a long way for the airline industry to go. Analysts have warned that Continental risks a liquidity crunch later this year if fuel prices stay at their current levels, but Chief Executive Larry Kellner said he saw room to raise cash to meet a year-end cash target of USD$1.5 billion.

“We are not looking at bankruptcy as an option,” he said. Still, the airline faces more pain ahead if fuel prices remain at their current high levels and will probably post a “substantial” loss for the full-year, he said.

So, in a bid to stay alive the airlines continue to adapt and restructure. Also this week we are hearing the news that US Airways and America West are discussing a possible merger. But what will it take for big decisions to be made about the future? Oil is a continually decreasing resource so even if prices can stabilise there is little point in hoping for savings there. Perhaps further losses, bankruptcy, casualties and mergers are all we can hope for before the world wakes up to a seriously creaking airline industry?


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