Flying the friendly skies could get ugly


WASHINGTON — At current oil prices, several large and small U.S. airlines will default on their obligations to creditors beginning at the end of 2008, and early 2009, according to a study issued today by AirlineForecasts, LLC and the Business Travel Coalition.

The study shows that $130-per-barrel oil prices will increase yearly airline costs by $30 billion, while airlines will be able to generate only $4 billion in fare increases and incremental fees.


The implication of this trend is that several large and small airlines will ultimately end up in bankruptcy, and of those, some will be forced to liquidate.

“If oil prices stay anywhere near $130 per barrel, all major legacy airlines will be in default on various debt covenants by the end of 2008, or early 2009,” the study stated. “U.S. commercial aviation is in full-blown crisis and heading toward a catastrophe.”


— The top 10 U.S. airlines will spend almost $25 billion in higher fuel costs this year over last year when jet fuel averaged $2.11 per gallon. Fuel hedge benefits could offset $5 billion to $6 billion of the increased fuel costs.

— Earnings for the group, when one-time reorganization charges are removed, were less than $4 billion in 2007, the only year of profitability this decade. The group could lose as much as $9 billion over the next 12 months if the current range of oil prices holds.

— Industry fares will have to increase at least 20 percent — across the board and on average — just to cover the dramatic gap-up in fuel costs from 2007. This is not possible given the level of uneconomic seat capacity in the system today.

Bright side

The upshot of higher fares is less traffic, and given a reasonable estimate of price elasticity, the industry will eventually be forced to shrink its seat capacity by 15 percent to 20 percent.

However, there is no guarantee that a transition to a smaller, more expensive (for the consumer) airline industry would be successful and sustainable.

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