Key Trends
High Jet Fuel Prices Challenging Financial Health of the Airlines
The current operating environment for the commercial airline industry presents a set of unprecedented challenges that may threaten the viability of even the largest fleet operators. A combination of $143 a barrel oil and a weakening global economy has forced over 20 airlines into bankruptcy this year and caused many others, including Air Canada, Qantas, and US Airways, to reduce capacity. Today's oil prices have reduced the financial effectiveness of capacity cuts, as even full planes are not cash-flow positive at these levels. Drastic measures such as fuel surcharges and baggage fees may not be sufficient to return the airlines to profitability. Operators are struggling to generate a profit as the rise in fuel prices has increased fuel expenditures to between a third and a half of most carriers' operating costs. In the equity market, volatility surrounds the sector as analysts have questioned the ability of industry participants to adapt to high oil prices.
The difficulties facing the airline industry have caused concern over the health of the order book for new commercial aircraft, since the order book is only as healthy as the customer accepting delivery. Over the near term, orders appear secure as the initial deliveries are going to international, regulated airlines that generally are in stronger financial condition. Uncertainty arises when the unregulated, mostly U.S.-based airlines are due to accept deliveries in 2010 and 2011. The effect on the global supply chain is unclear, as the airline industry must face the difficult decision of buying new, more fuel-efficient aircraft or cancelling orders in order to conserve cash. Read complete report.
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