Airlines hope to avoid bailout or bankruptcy
The economic picture is grim. But some may turn a small profit.
Despite all the grim economic news, the American airline industry remains cautiously optimistic it will make it through 2009 without a bailout or major bankruptcies.Skip to next paragraph
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A few carriers may even make a profit, if only a small one.
The reason: Most major airlines have been in economic-crisis mode almost nonstop since 9/11, which has forced them to become leaner, more efficient operations and thus, more resilient during this downturn.
This week the International Air Transport Association announced it had almost doubled to $4.7 billion its forecast of projected losses internationally in 2009. But it also singled out the North American region, saying it was expected “to deliver the best performance in 2009 with a combined $100 million profit.”
More solid footing
The American Air Transport Association, which represents major US carriers, has so far declined to make any revenue estimates for 2009, citing the volatile and uncertain economic situation. That’s because if the price of oil spikes suddenly, any hope of a profit will disappear with it. Still, the group notes that the industry as a whole is on “fairly solid footing” as it deals with this downturn.
“The airlines have been on this weight-loss program for a very long time,” says David Castelveter, a spokesman for the Air Transport Association. “We have made the very hard choices of reducing capacity, laying off employees, deferring airplane orders, [instituting] a la carte prices and putting fuel surcharges in place to weather this storm.”
The dramatic drop in air traffic in the immediate aftermath of 9/11, along with stiff competition from growing low-cost carriers, forced the large American network carriers to fundamentally restructure their business models over the past eight years. Most have been in and out of bankruptcy, which has allowed them to cut costs by restructuring labor and other contracts.
Last summer’s fuel crisis, when the price of oil rose to almost $150 a barrel, also hit the American carriers much harder than many overseas carriers.
That’s because European carriers were able to pay for oil with euros, rather than dollars, and they were better hedged against the high prices. The American carriers, on the other hand, were suddenly faced with having to find hundreds of millions of dollars in new revenue to make up for the more than tripling of the price of fuel.
“The [American] carriers got panicked at $147 a barrel, so they put in some historic, draconian cuts in the fall, reducing capacity 10 to 11 percent,” says Kevin Mitchell, chairman of the Business Travel Coalition in Radnor, Pa. “The second thing they did was to start the process of unbundling [ticket prices and charging for ancillary services, like checking baggage.]”
Oil price is key
Overall, that has left American carriers better positioned than many European companies, at least as long as the price of oil remains relatively stable. Last summer, every dollar increase in the price of a barrel of oil added $430 million in costs to the airlines’ bottom lines.
“We will come out of this recession sooner or later. We have made very difficult cuts, and the industry is optimistic,” says Mr. Castelveter. “But we have to stay conscious of price volatility on the fuel side.”