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Fuel spike makes US carriers suffer

Soaring oil prices claimed their first victim in the US airline industry late last week with Aloha Airlines filing for bankruptcy protection for the second time since 2004. Cracks are also beginning to show at other US carriers as they struggle to cope with the pressures of operating in such a high fuel price environment.

Hawaii-based Aloha filed for Chapter 11 on 20 March, citing rising fuel costs and competition from new low-fares rival, Mesa Air Group's Go!. Aloha, which also filed for bankruptcy protection in late 2004, says that with oil recently hitting $111 a barrel its annual fuel bill will rise by $71 million. Aloha told the bankruptcy court that it is looking for a potential buyer after its owners, led by a California-based private equity firm, said they were unwilling to inject any additional cash. Airline consultant Bob Mann of RW Mann says the prospects of Aloha finding a buyer may just be a case of "dreaming. Or perhaps hope springs eternal". Mann notes that Aloha "has few unencumbered assets and its costs just are not low enough".

Elsewhere in the US, Columbus, Ohio-based low-cost carrier Skybus announced that its founding chief executive, Bill Diffenderffer, was stepping down with immediate effect to concentrate on writing books. He was replaced by the carrier's chief financial officer, Mike Hodge. Skybus has also been battling with high fuel prices and over the last few months has pulled out of longer-distance routes as a result. The carrier was forced to cancel a new route from Columbus to Niagara Falls, New York before it had even begun, and it will end flights to Chattanooga, Tennessee within weeks of their launch. Skybus, which began flights in May last year, lost more than $16 million in the third quarter.

Announced in the last week:

*JetBlue will sell four more Airbus A320s, on top of the six it previously announced that it would sell. In total, 10 A320s will leave the discounter's fleet by early 2009

*United will remove 10-15 older mainline jets to help offset fuel costs that could swell $1.2 billion more than planned this year. United has led in pushing fares higher to offset rising fuel prices. But chief financial officer Jake Brace warned the JP Morgan Airline and Transportation investor conference that airlines probably will not be able to raise fares enough to offset higher fuel prices

*Delta will dump 15-20 older, less efficient mainline jets, plus 20-25 regional jets. The change will result in a 10% reduction in Delta's domestic capacity by year-end. Delta also will eliminate at least 2,000 jobs

*US Airways will operate three fewer aircraft during the second half of the year than previously expected and could cut back more

*American plans to axe as many as 300 management jobs by year-end

Even with downward fluctuations the price of oil stays well above $100 a barrel, and with the airline crack spread (the difference between the price of crude oil and the petroleum products extracted from it) the real cost to carriers is closer to $130 a barrel. Competitive pressures have made it harder to raise prices enough to pay the bill for this basic necessity of airline life. American Airlines, for example, says its fuel bill will likely rise by $2.6 billion this year over last.

The problem is simple, and Continental Airlines chief financial officer Jeff Misner sums it up well: consumer demand may still be "pretty good, but the problem we've got is we're not covering the cost of fuel right now...We can't get the prices up fast enough to cover that". Misner added at the recent JP Morgan Airline and Transportation investors conference in New York: "And if that's not enough for you ... maybe we'll throw a recession on top of that, and a weak dollar just to kind of make sure it stays real, real interesting."

Meanwhile, capacity cuts at airlines from the largest on down to the smaller players are continuing. Frontier, the troubled Denver-based low-fares carrier, has arranged the sale of four of its aircraft, moving quickly after announcing its plans to downsize in January. It will sell two of its 49 Airbus A319s and two of its 11 A318s to a leasing firm that has lined up a customer, Rossiya Airlines in Russia. AirTran Airways has already said it will sell two of its relatively young Boeing 737-800s in April.

Other carriers have moved to trim capacity for the winter and indeed for the rest of the year. But with fuel continuing to stay stubbornly high, these steps may not be enough and now that airline mergers seem to be off the front burner, some have begun speculating about the prospects of another round of bankruptcies at the large carriers. But JP Morgan analyst Jamie Baker sees bankruptcy as having limited use to airlines. Baker says the rising cost of fuel would quickly overwhelm bankruptcy savings, and adds that aggressive capacity cuts may offset part of the expected pain, but he does not believe "the industry can move quickly enough to put much of a dent in forecasted losses" of as much as $9 billion for the year.


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