Willie Walsh, head of the newly launched British Airways-Iberia merger IAG, wants to replace Iberia's 36 fuel-thirsty, four-engined Airbus A340s. With oil threatening $120 a barrel as he spoke, he presumably regards this move as a very high priority indeed.

Walsh reckons he can get more efficient aircraft that are already available to see IAG through until less-thirsty Airbus A350s or Boeing 787s are on stream. Since every airline would like to replace less-efficient with more-efficient aircraft, Walsh is either engaging in wishful thinking or he sees carriers in such distress that they would welcome his call as an opportunity to turn prized assets into desperately needed cash.

Iberia A340
 © Airbus
Looks nice until you tank it up

Don't be surprised if he finds some takers. IAG's prospects hardly look healthy - its shares have been on a steep descent since its January initial public offering - but IAG isn't alone. While stock markets have been enjoying a long rally, airline shares have been going south and it is not hard to see why. Fuel represented more than a quarter of operating costs last year, when oil averaged just $79/barrel. At $100-plus, the industry is into heavy losses, and since most airlines started frantically slashing non-fuel costs back in 2008 when oil soared to its pre-crisis peak of $140, there is not that much more they can do now do counter the latest rise.

What worries airlines is the prospect of a long haul at $100 or higher. Oil's been rising for months, but some of the impact on jet fuel is down to refineries having to choose between it and heating oil, so airlines have paid for a cold winter in North America and Europe.

Just as that effect should be easing off, Middle East turmoil looks increasingly like an oil supply shock. Some disruption to Libyan output can be coped with, but the market isn't prepared to bet against revolution fever spreading to Saudi Arabia.

Two background trends are also alarming: emerging-country demand for fuel means soaring global demand, and a century of heavy oil production has depleted reserves to the point where we are, metaphorically speaking, scraping the bottom of the barrel.

A sustained price of $100 may be high enough to dampen economic recovery. If so, oil prices may ease off, but the supply-demand situation doesn't leave much room on the downside and for airlines a weak economy is as poisonous as costly fuel.

For many airlines, selling aircraft to IAG and shrinking or even getting out may be the alternative to going bust. Good luck, Willie.

Source: Flight International

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