Turbulence Ahead

Oil prices force the airline industry into a tight corner
The last few days have been good for the airline industry. At the biennial Farnborough Air Show, aviation’s showcase event, an airline made one of the biggest commercial aircraft orders in history, ordering 205 planes, half from Boeing and half from Airbus.

Airline shares across markets have surged because the price of oil has fallen by more than $10 a barrel since Wednesday and the losses announced by two major American carriers were lower than estimated. But this is unlikely to provide more than temporary relief to an industry that has hit very rough weather. The spiralling cost of aviation fuel has left most airlines struggling. The International Air Transport Association (IATA) estimates that the global airline industry will plunge from a net profit of $5.6 billion last year to a loss of $6.1 billion this year, if oil prices remain at or around present rates. To cope, airlines across the world are cutting down flights and grounding planes. Indian carriers have decided to ground 100 aircraft. Two of India’s biggest airlines, Air India and Jet Airways, are each losing a staggering $2 million a day. IATA says that at least 24 airlines worldwide have already become bankrupt in the last seven months. The deteriorating world economy is not helping. Corporations the world over have reduced business travel in an attempt to cut costs. Airlines are trying to offset their losses by raising fares and fuel surcharges. But this is a double-edged sword, as increased prices mean fewer customers. A case in point is India, where the price of aviation fuel has tripled over the past three years and is now the highest in the world. It’s 80 per cent higher than in most countries, including the US and Britain, leaving airlines no choice but to pass some of the cost on to consumers. Some reports suggest that as a result, air traffic in India has declined by as much as 15 to 20 per cent over the past month. Fuel now comprises 50 per cent of the operational cost for India’s domestic airlines, while globally, fuel has risen as a share of airline costs from 13 per cent in 2000 to about 35 per cent now. But there is a silver lining. The increase in fuel prices and the pressure on the airline industry to reduce emissions should incentivise purchase of more fuel-efficient craft. The good news is that the aviation industry is stronger than it was during its last downturn following 9/11. But the industry will need nerves of steel to sail through this storm.