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Analysts forecast US airlines to suffer reversal of fortunes in 2008 as fuel price continues to bite

Analysts forecast US airlines to suffer reversal of fortunes in 2008 as fuel price continues to bite

(photo: DFW Airport)
Fri 28 Mar 2008 - Estimates at the beginning of the year that airlines in the United States might make a small profit in 2008 have now turned to an industry loss running into billions of dollars. The price of jet fuel has risen 30% since January, and 70% higher than a year ago. Airlines have started to trim routes and capacity but it is probably too little and too late, and the impact of a slowing economy is still an unknown factor.
Standard & Poors has downgraded its long-term credit rating for AMR Corp, the parent of American Airlines – the world’s biggest carrier by passenger traffic – and American Eagle Airlines. After a profit of $504 million in 2007, S&P estimates AMR could lose more than $1 billion this year, and that is based on an average crude oil price of $97 per barrel. The price recently touched $110 per barrel, although it has eased in the last week or so.
AMR said earlier this week it expects to spend $9.3 billion on fuel in 2008, up more than $1 billion from its January estimate and $2.6 billion more then it spent in 2007. The company raised the price it expected to pay in January from $2.65 a gallon to $2.98, based on total usage this year of 3.1 billion gallons of jet fuel. Through hedging and fuel conservation, AMR is mitigating the impact as best it can. Last year, it reduced fuel consumption by 96 million gallons through its Fuel Smart programme, which encourages fuel economies such as pilots taxiing on one engine rather than two. As of January, AMR had hedged about 24% of its 2008 fuel requirements, locking in an average price of $2.31 a gallon.
It is a gloomy picture elsewhere for the other major US airlines. Last week, United Airlines forecast a $1 billion rise in its annual fuel bill. Continental Airlines sees as much as a $1.5 billion increase and Northwest Airlines expects fuel costs to be $1.7 billion higher than in 2007. S&P now expects US Airways to post a “significant” loss on concerns of high fuel costs and a weakening economy.
A problem with most of the larger US carriers is the comparative age of their fleets, which burn more fuel and are more costly to maintain than those of European and Asian competitors. Many of American Airlines’ elderly MD-80 fleet had to be grounded this week for wiring checks, with resulting flight cancellations. A study by The Boyd Group aviation consultancy reported last week that surging fuel prices have rendered many airliners too expensive to operate, making them “economically obsolete”.
And it’s not just in the US that fuel prices are hurting. This week, Europe’s biggest low-cost airline, Ryanair, announced it was freezing the salaries of its senior management and reviewing all its major costs including staffing, handling, and fuel and currency exposures. It was reported to be in discussions with airports it serves over fees, expecting them to “shoulder the burden” of rising fuel costs. Ryanair boss Michael O’Leary expects a 50% drop in profits over the next 12 months as the airline’s current $68 per barrel fuel hedges expire next month.



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