April: A cruel month for airlines

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After the relative blossoming of the airline business last year, with some posting record profits, the past month has seen the industry's fortunes wilt under the influence of the economic downturn and record oil prices. And the gloom is set to continue

In the early 1960s, shortly after coming to power, British prime minister Harold Wilson is famously supposed to have commented that a week is a long time in politics. The fortunes of those pursuing a political career can certainly oscillate wildly in seven days. For those pursuing a career in aviation, the timeline when encountering turbulence is never ­usually quite so short - until now.

April 2008 will go down in aviation folklore as the month that the industry's cyclical downturn took its first casualties. Hardly a day went by as the month began without some momentous or bad news. April will also be long remembered for starkly different reasons in the boardrooms of British Airways, Delta Air Lines and Northwest Airlines. The former was dealing with a botched move into an airport - Terminal 5 at London Heathrow - that was billed as a transformation in the customer experience. The latter two are engineering a merger that could create the world's second mega carrier after Air France-KLM.

It was not supposed to be like this. Just six months ago, US and European network carriers were posting record profits and even though high fuel ­prices made boardrooms wince, they appeared manageable. The turnaround is dramatic, and one almost exclusively driven by oil prices that journalists are running out of adjectives with which to describe their fast rise. The facts are that jet fuel was over 70% more expensive in March compared to a year ago, and still rising. IATA ­estimates that the industry will pay a staggering $58 ­billion more for its fuel in 2008 ­compared with 2007.

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"With no immediate cessation in the violence of high fuel prices in sight, further casualties are inevitable"

Small wonder then that some have thrown in the towel. It all started on 30 March when Hawaiian carrier Aloha Airlines said goodbye, carrying its last passengers after filing for bankruptcy days earlier. Within days two smaller low-fare players ATA Airlines and Skybus were shutting down, while a larger player, Frontier Airlines, was taking the bankruptcy road. These are the very players who were supposed to be testing the new boundaries of the model for low-cost carriers, while the big guys were supposed to be trying to establish new ways of working with labour. As recently as late February, Delta executives were talking about doing no merger with Northwest ­without full pilot buy-in.

Crisis measures to cope with the fuel funk are coming in at every US carrier. For instance, after posting a loss of $80 million for the first quarter, Continental Airlines said it would remove an extra 14 older and less fuel efficient 737s from its fleet to cut back its domestic operations. According to chief executive Larry Kellner: "The international business is working at these fuel prices. The domestic industry is not."

For Oasis Hong Kong Airlines the international marketplace was too tough. After less than 18 months in business, the long-haul low-fare carrier called it a day in the second week of April, pointing the finger squarely at fuel as the culprit for its woes.

But Oasis may be the exception in this region. Carriers in the Asia-Pacific are far from being as doom laden as their counterparts in the USA. However, while the emerging markets of China and India continue their relentless growth spurt, it is an almost entirely unprofitable endeavour for the time being. Indeed Jet Airways chairman Naresh Goyal recently said that Indian carriers could collectively ­report losses of $1 billion for last year.

European carriers have, thus far, held out. As easyJet chief executive Andrew Harrison says in our cover interview this month, the high price of fuel "will kill some airlines, but it won't kill this one". However, the UK-based low-cost carrier has issued a profit warning because of fuel, while Ireland's Ryanair says it will ground 20 737s this winter rather than fly them as it will be cheaper to do so.

With no immediate cessation in the violence of high fuel prices in sight, further casualties are inevitable. Some low-fare players in particular look vulnerable. Buoyed by strong cash flows generated by healthy traffic in the past, they will have to switch from denial to confession about their plight.

It was American poet TS Eliot in his 1922 poem The Waste Land who wrote that "April is the cruelest month..." As far as the airline industry is concerned it is a month when the cruelty may only have just begun.

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