Record oil prices spark aviation growth fears

22nd May 2008

Oil prices surged to an all-time of US$133 a barrel, driven by fear of supply shortages. The news reignited fears for companies and analysts that the rise would further dent profits and growth.Crude prices have risen six-fold since 2002, driven by demand of China, India and other developing countries, and forecaster predict they need to US$200 a barrel to reduce demand growth to zero.

The hike is hitting the aviation industry hardest. American Airlines has announced significant reductions to its 2008 domestic flight schedule, including slashing capacity by 11% from last year. It also outlined plans to retire at least 75 mainline and regional aircraft and unveiled several revenue growth initiatives, as the company responds to record fuel prices, growing concerns about the economy and a difficult competitive environment.

“The airline industry as it is constituted today was not built to withstand oil prices at US$125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy,” said Chairman and CEO of parent company AMR Corporation, Gerard Arpey. “Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve. We must work to overcome our near-term challenges and to secure our company’s long-term future for the benefit of our shareholders, customers and employees. We must find ways to cover the cost of providing our services so that we can remain viable and have the resources to reinvest in our company for the future. Those goals are central to the actions we are outlining today.”

AA is also introducing a $15 fee for the first checked bag on many flights, against the backdrop of increasing costs of transporting checked baggage. It is also increasing its fees for certain other services, ranging from reservation service fees to pet and oversized bag fees. The increases mostly range from $5 to $50 per service. The company estimates that new and increased fees announced this month will generate several hundred million dollars in incremental annual revenue.

“While we understand that these fees affect customers, we also believe that our pricing for the services we provide remains extremely competitive in the industry and continues to offer our customers ample choice and value,” Arpey said. “The bottom line is that our revenues, which include ticket sales and fees, must keep pace with our increasing costs.”


As evidence of the crisis caused by soaring fuel prices, Arpey cited the U.S. airline industry’s first quarter 2008 pre-tax loss of nearly $2 billion excluding special items and the fact that eight U.S. airlines have filed for bankruptcy protection this year, including five that have ceased service. AA paid $665 million more for fuel in the first quarter than it would have paid at prices from the year-ago period. Its first quarter fuel expense increased by 45% year over year, while its total revenue increased by 5 percent. The price of jet fuel has increased by more than 10 percent since April 16, when AA expected its 2008 fuel bill would be well over $6 billion higher than in 2003.


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