Worst case scenario

It’s a crisis, and the airlines know it, but what happens if it gets worser or more worse? Our friend Bill Swelbar, the MIT airline guru who writes Swelblog, has an idea that he thinks may catch on. Bill says that the oil crisis is something like the crisis that overtook aviation after the 9/11 crisis. 51YE6VFYCDL._AA240_.jpg After all, it’s an external event over which the airlines simply have no control, somewhat like a force of nature. This could allow airlines to trigger a legal provision that they used back late 2001 when they furloughed or fired many of their workers and parked or disposed of some of their planes. It’s called force majeure, and it withstood a number of earlier challenges. You can read Bill’s explanation of this legal doctrine and how it could apply by going to his blog. (Full disclosure: Swelblog references a Left Field posting, but we thought the world of Bill long before he quoted us.) From Swelblog: I think it is time for the industry to think about consolidation in yet another way. Typically we think about consolidation as two entities combining through merger activity. But there is financial consolidation as well. It is similar to what we experienced during the 2002-2006 period where an industry contracts on its own volition. It is probably time to begin another round of contraction as the price of oil makes it very difficult for the industry to maintain its current service offerings.
In my last blog post, I purposefully left the piece hanging on an issue for labor and the politicians to seriously consider: “Politicians and labor should think real hard about the fallout virgin8.jpg that could stem from the current economic environment [read to include high oil prices] versus what the perceived fallout could be in a consolidation scenario”. As the market opened this morning, oil traded near $112 per barrel. Whereas the price has pulled back from those highs, it is becoming clearer that oil is going higher as the highs get higher and the lows get higher. Heeding warnings from the industry that capacity will be closely examined at these prices, I began to write this piece.
Then as I was writing, I did my usual check of the headlines as the day wore on. In one check of the day’s news, I read, as everyone should when you are not reading here to steal a Maxon line, a blog post by David Field of Airline Business on his blog named appropriately Left Field. Mr. Field cites quotes directly from Delta’s Anderson, Northwest’s Steenland and Continental’s Kellner each questioning the size of their respective networks in the face of $105 per barrel oil.

Swellblog goes on to define force majeure and discuss it:

Force majeure (French for “greater force”) is a common clause in contracts which essentially frees both parties from liability or obligation when an extraordinary event or circumstance beyond the control of the parties, such as war, strike, riot, crime, act of nature (e.g., flooding, earthquake, volcano), prevents one or both parties from fulfilling their obligations under the contract. Name any airline that spent time in bankruptcy and was required to file a plan of reorganization that correctly estimated the price of oil in that plan. United assumed $55 per barrel and that was $50+ per barrel ago. Northwest just recently emerged and it assumed oil $40+ per barrel ago.

For more, just go to Bill’s blog

, , , , ,

Leave a Reply