In a deeply pessimistic assessment of the American airline industry, Moody's, the credit ratings agency, said yesterday that the business models of many carriers were “unsustainable”. The agency's analysts said that US airlines were particularly vulnerable to high oil prices and even large carriers could be forced into bankruptcy.
The record high price of oil has increased operating costs for airlines around the world and many are struggling to survive.
The American carriers collectively lost about $2 billion (£1billion) in the first quarter of this year and they are reducing capacity to cut their losses. Thousands of jobs are expected to go when at least 10 per cent of scheduled flights are cancelled later this year.
European airlines are also suffering from high fuel costs with British Airways giving warning that its profits could be wiped out this year and Ryanair saying that it was likely only to break even or may possibly lose money this year.
However, the US carriers are suffering most as they have fleets of very old aircraft. These use about 40 per cent more fuel than the latest generation of planes and therefore cost substantially more to fly.
Moody's said: “In the current environment, with many airlines seeing a more than 30 per cent year-on-year increase in their fuel costs, nearly 50 per cent of an average ticket is consumed by fuel, leaving inadequate coverage of other key costs such as labour, equipment rentals, debt service and overheads. Without an ability to cover costs and earn an adequate return, the business model for most airlines cannot be sustained under current fuel price conditions.”
Airlines in the US are attempting to raise extra revenue by introducing new fees, such as a $15 charge for checking a first piece of baggage and another $30 for checking the second.
Carriers are also charging for water and coffee onboard and have introduced fuel surcharges to ticket prices to cover the higher cost of oil.
BA has also responded to rising fuel prices by introducing the surcharges, which have increased from £70 for a long-haul return flight at the start of last year to £218. This is now more than the basic flight for a typical London to New York fare.
Moody's said: “We do not believe it will be possible for airlines to cost-cut or capacity-reduce their way back to profitability. Long-term industry viability will depend upon a pricing environment in which airlines can adequately recover the significant costs of fuel, labour and capital investment.”
However, airlines may struggle to continue increasing fares in the face of slowing economies in the US and UK. The worsening economic situation on both sides of the Atlantic means that passengers have less money to spend on travel, so higher fares may force them to stay at home.
BA said this week that increased charges and the slowing economy had contributed to 87,000 fewer passengers travelling with it last month. The airline's load factor - the measure of how many people each aircraft carries - fell 3.8 percentage points to 76.7 per cent, meaning that nearly one in every four seats was empty.
By comparison, Ryanair's load factor in June was 84 per cent, down 1 percentage point on the same period last year.
Load factors are a good measure of how well an airline is performing as empty seats produce no revenue but cost money to transport from one side of the world to the other. An analysis by The Times of BA's load factors in recent years shows that the situation for the British flag carrier has worsened markedly in the past few months.
The onset of summer has led to higher load factors than earlier this year, as is normal for the airline industry, but the increases in BA's passenger numbers has been at a much lower rate than in 2007 and 2006.
The weaker growth in passenger numbers coincides with a dramatic jump in BA's fuel surcharge this year. The airline has increased its charge three times since February from £128 for a long-haul return to £218.
Doug McVitie, managing director of Arran Aerospace, an aviation consultancy, said: “Demand for air travel falls off in direct response to rises in fares so now is not the time to be soaking the customer with these surcharges. There is a tipping point at which airlines have to absorb more of the increased costs, no matter what that does to their profit margins.”
Moody's says business models of many airlines 'are unsustainable' - Times Online