Airlines flying into far worse turbulence than predicted, analysts warn

[PAXboy]

The Independent
By Danny Fortson, Business Correspondent
Thursday, 19 June 2008
The airline industry will be hit by a downturn far worse than even the most tumultuous periods in recent memory – the post- 9/11 years and the early Nineties recession – new research predicts.

Morgan Stanley slashed its earnings forecasts yesterday for several major European carriers, including British Airways and easyJet, in the latest of a flurry of gloomy assessments of the industry. Penelope Butcher, the analyst who authored the report, warned that although the record oil price has already led to two dozen bankruptcies worldwide in the first half of this year, the worst is yet to come.

"The unprecedented move in crude and jet fuel prices over the last 12 months means that fundamental valuation methods are no longer valid for the airline sector," she said. "Industry returns are likely to be the lowest we have seen in recent history (including the last global recession and even September 11) and carriers could well break previous lows on [valuation] multiples". Several carriers will be plunged into loss, she added.

FULL STORY

http://www.independent.co.uk/news/business/news/airlines-flying-into-far-worse-turbulence-than-predicted-analysts-warn-850093.html

[Nightfire]

Hardly surprising. I think that all the predictions of oil-prices stabilizing at about US$80/barell are merely wishful thinking. More likely this will be the end of "low-cost" flying altogether.

[fourgolds]

I think we should all shelter down to the word " Incoming !!!!!"

I have always said that even during good times management continuously eroded our terms and conditions. just wait for the bad times.

buckle up boys and girls.

[Dysag]

"the end of "low-cost" flying altogether"?

1) it's normal in a capitalist economy that not all players survive.

2) due to higher load factors, the loco's have lower fuel cost/pax.

3) history shows that vfr / vacation travel is very recession resistant.

4) folks have very short memories, or are just too young to know that....

5) when the worst is over, the fittest will have survived, loco's included.

6) on short-haul, the real low COSTs will always beat the dinosaur carriers.

[ukdean]

Good, bye bye ryan air.......RIP,

[geordiejet]

I think we will see more Ryanair cost custting measures spreading to more airlines. Just we will end up paying BA prices for it. As for BA - I'm really not sure - it will have to be VERY good for the prices it will have to charge. And I'm afraid the problems over the past year or two do not go well in their favour. The LCCs are here to stay. It is business travellers that are the most sensitive.

[Nightfire]

Dysag,

maybe I should be more specific. Of course I don't mean that this means "Low Cost Airlines" will cease to exist. I mean that Tickets will no longer be cheaply available.

1) it's normal in a capitalist economy that not all players survive.

Of course.

2) due to higher load factors, the loco's have lower fuel cost/pax.

True, but the profit-margin will decrease, because the ratio between ticket-prices and operating costs will be less.

3) history shows that vfr / vacation travel is very recession resistant.

I disagree to that; if people have less money to spend while at the same time ticket prices go up, then the demand goes down. People think twice before going on a weekend-trip when it gets expensive. They will still travel, but not as often as before.

4) folks have very short memories, or are just too young to know that....

...that what? I don't understand this point.

5) when the worst is over, the fittest will have survived, loco's included.

See point 1). I fully agree to that.

6) on short-haul, the real low COSTs will always beat the dinosaur carriers.

Not so sure about that. Some of the LOCOS will go, as well as some of the "dinosaurs" as you call them. Right now, the trend is that the dinosaurs reduce their service (or charge extra for it), or operate their own low-cost daughters. The difference between low-cost carriers and the major carriers is getting less and less.

What I mean to say is, that flying will become more and more expensive. You won't be able to fly across Europe for 0.99 Euros anymore. There will still be cheaper tickets available than the dinosaurs' offer, but they won't deserve to be called "Low-Cost" anymore.

[A and C]

I don't think that the so called "low cost" airlines deserved the title in the first place "low service" would be a better title.

As the fuel cost becomes a bigger proprtion of the total ticket price it will be no longer worth the risk of flying with low service airlines because due to the very restrictive ticketing policy that the low service sector has the passenger will have too much to loose if he misses a flight.

I won't fly with one of the low service airlines now because the difference between the cost of a "low service" ticket and the normal airlines is not great enough to cover the hassel factor.

[haughtney1]

I won't fly with one of the low service airlines now because the difference between the cost of a "low service" ticket and the normal airlines is not great enough to cover the hassle factor.

Is suspect A and C, that you are in the minority on this.
Yes Legacy carriers will look to save costs, just as Lower Cost carriers will do the same.
Don't forget that many many legacy carriers are crippled by restrictive labour practices, high administrative costs, and the commercial pressure to maintain frequency on certain routes that offer poor yields..

Lower cost carriers have typically more ability to be flexible, innovative, and adaptable. Certainly many of the marginal carriers will fall by the wayside, but I would argue that Lower cost operators will feel less pain in the current environment as many potential customers search for the best value proposition in the marketplace.....and that for many customers is not a legacy carrier.

[IB4138]

When will these so called expert financial analysts in financial institutions learn to keep their big gobs shut? All they do is speculate and cause fear and unnecessary panic through predictions that Mystic Meg must have taught them how to make....and we all know how successful she was.

Gypsy Rose Lee would make a better job of predicting the future by looking into her crystal ball than these over paid, office chair bound, clowns. :mad:

[Viking101]

I think its healthy for the business in a little way, to clean up the industry from all small and less efficient airlines.

As you experienced people know, the industry goes through tough patches about every 10 years for different reasons. Here we are again, and time to strap in for a while. It will calm down soon again and the remaining airlines then will start growing fresh. Then, together with new low cost ideas with massive prospects and future, the wheel starts turning again.

Dont you just love this? :suspect:

[Metro man]

Low cost will survive because it will be the last option between going or staying home. $200 saved on a $700 fare is smaller % wise than $200 saved on a $500 fare but it is still $200. work out the "earnings" to be had in flying low cost vs full service, $$$ saved divided by number of hours flown, it can be considerable.

During a down turn people will down grade from first to business, business to economy and economy to low cost.

During an upturn people upgrade in the opposite direction and people who wouldn't normally have flown go low cost.

If prices go higher expect some of the lower end business travel to be low cost as well. The accountants will be under pressure to find savings and downgrading company travel is an easy one.

An LCC is under no pressure to have a network and can simply drop underperforming routes and start new ones in the blink of an eye. If they have X number of airframes they simply put them where the money is.

Not all low cost airlines will survive but I bet Ryan Air will.

[EI-BUD]

While we read that Ryanair may suffer in the times ahead due to unhedged fuel and harder times, I think that competitors beware.

1. No matter how long the fuel prices remain high no airline has unlimited (time wise) hedging.
2. It will eventually be a level playing field for fuel purchasing (relatively)
3. Ryanair will further cut costs and find alternative revenues to mitigate against possible losses and importantly,
4. They will emerge after the fuel situation stabilises, a more fierce and more competitive model

Not to mention the bank balance, its opportunity in hard times to get the prices down on the long haul fleet, and remember the Long Haul business has been many airlines saviour in recent years when faced with LOCO competition.. what if MOL gets onto Key routes and undercuts by half!!!!


What does anyone else think?

EI-BUD

[beamwidth]

EIBUD, The points you make have merit.
However
While we read that Ryanair may suffer in the times ahead due to unhedged fuel and harder times, I think that competitors beware

The Ryanair view is that prices will drop below $100 by end 2009

http://www.ireland.com/newspaper/breaking/2008/0617/breaking65.htm

They are in the minority with this view ( Goldman Sachs et al predicting $200 in the short term). O Leary is taking a big punt here.True he has cash reserves, but they may disappear quickly if oil keeps rising and he remains unhedged.
For Ryanair it will end up one of the following
a) spectacularly great or b) spectacularly bad
People thought he was crazy post 9-11 with his purchases from Boeing - it proved to be good business.
Personally I think that this unhedged fuel position will be his Arnhem.

[IB4138]

When will these so called expert financial analysts in financial institutions learn to keep their big gobs shut? All they do is speculate and cause fear and unnecessary panic through predictions

Goldman Sachs et al predicting $200 in the short term

See what I mean?

When will people realize that these predictions are not credible and reached , in what is uncharted territory, by simply sticking a finger in the air?

Time a few of these "experts" were discredited and their words not leapt upon with any modicum of truth.

[beamwidth]

Time a few of these "experts" were discredited and their words not leapt upon with any modicum of truth

I agree with you on this point. However, these people are being listened to, creating panic buying and driving up demand and therefore the price.
There are plenty of untapped oil reserves (e.g. the vast "heavy oil" fields in Canada and many other locations). Economic viability is key to their extraction.
When oil was less than $100 per barrel, this was not even being looked at. With the current price and trends this oil extraction becomes viable. However, only while oil remains at this inflated price. A vicious circle then forms
Extract the now commercially viable oil - supply increases - price drops - this oil now no longer economically viable to extract - supply drops - price increases etc etc etc

[HZ123]

It seems some of us question what the 'experts' say? Mystic Meg et al probably earn a sight more than most of us contributing to this website. Fuel prices at the local garage have reached a painful level, of that even I am sure. Fuel sources are not infinite that to we can be sure of. LC are not low cost and have not been so for some time. Boom and bust has been part of the financial market since the 1900's therefore I fail to see why many seem to be surprised at the present scenario. As for the pundits so far they have been correct and if they state things are going to get a lot worse many would do well to heed the warnings not scoff at them.

p.s MM will still be in a job whatever the state of world finanace. Who is the Spanish equivalent?

[Surrey Towers]

There are always going to be requirement for seats - lots of 'em. However, there is a widening gap between lo-co's and scheduled services and it is most likely that the latter will be the losers, some evidence of that is already with us.

What must be worrying is the prospect of a massive downturn in pax wanting to go abroad. After the shoulder months have gone the charter carriers will find it tougher and tougher to sell seats to a market that will have gone into decline. The balance sheets will start to look precarious. The problems that brings, as in previous years, could once again see the weaker airlines failing.

The problem is not going to go away. The probability is it will get worse. It will certainly need nerves of steel and a good reserve of cash to survive. Then the worry of next year starts all over again as people will more likely than not have the money for holidays.

Unless the government can stop the greed of the oil moguls, this one single commodity is causing airlines to dip into their dwindling profits which, will in turn, cause a repeat of airlines going bust.

The knock on effect is too terrible to think about but think they must - or die.

[leisurelad]

Hello,

With alot of MD80 operators in europe, do you think these guys will suffer badly due to the increase in fuel. Am i correct to say that these are gas guzzlers.

Just thinking of the likes of Nordic / SAS / FlyExcellent / Euroair / Viking / Aviajet / Hello etc

Wonder if these guys will make it through although sometimes the smaller carriers are able to adapt quicker than the majors.

What do others think about the above

Cheers

[IB4138]

.....and just what is wrong with Spanair?

Why have you excluded probably the European airline with most MD80's ?

[Re-Heat]

Because it is SAS Group perhaps

[leisurelad]

Don't want to exclude anyone, far from it. Was just a few names that popped into my head, there are many MD80 operators out there are, these were just a few.

So, back to the question, how will fuel effect the MD80 operators or is the cost of the fuel outweighed with cheaper lease costs maybe ??