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Article Excerpt
Losing roughly $10 billion last year largely on the heels of staggering fuel costs, the domestic airline industry in 2005 continued to operate in survival mode. Figures place industrywide losses north of $40 billion since its last profitable year in 2000, but analysts and industry watchers are mustering a degree of optimism for this year--with some forecasting aggregate 2007 domestic carrier profits.
While passenger traffic and load factors hit new highs in 2005, nagging fuel costs and low airfares kept profitability at bay for most U.S. carriers.
Add to that list "poor management," which analyst Julius Maldutis, president of Aviation Dynamics, said also has fueled airline losses.
However, any domestic airline executive can detail a laundry list of woes that the industry continues to face, from mounting jet fuel costs to a high tax burden and, for legacy airlines, increased competition from pricing-power-wielding low-cost carriers, as well as--for solvent carriers--luxuries afforded to the bankrupt ones. As one airline consultant at the Association of Corporate Travel Executives conference held in Atlanta this month said in passing, "They never stop complaining."
Topping the list of complaints is fuel. The Air Transport Association reported the airline industry's total fuel bill more than doubled from 2003 to 2005 and increased $10.3 billion between 2004 and 2005. "In addition, the first-quarter price data suggests higher average prices throughout 2006 versus 2005," ATA said.
With oil prices last year averaging $56.48 and the crack spread--the cost to refine oil into jet fuel--at $14.24, airlines spent on average more than $70 per barrel on jet fuel, a staggering cost they said pushes profits out of their grasp.
The Benchmark Co. managing director Helane Becker said such prices could not support profits for major carriers. "Fuel can be around $60 to have a break-even year, but it can't be around $70," she said.
Fuel remains the X factor for when--or if--airlines return to profitability. Guy Caruso, administrator of the U.S. Department of Energy's Energy Information Administration, during a presentation earlier this year in Washington, D.C., dashed the hopes of the airline industry. "We're not going back to the $20 to $25 per barrel of oil that we were used to in the '80s and '90s," he said.
Caruso did, however, offer some optimism, noting that the oil market would steady and keep oil in the $50 range for both long-term and short-term outlooks. Furthermore, Caruso said airline fuel consumption is staying steady and may even go down, while load factors are up and more fuel-efficient aircraft continue to enter the marketplace.
Whether oil prices abate, increase or hold steady, Aviation Dynamics' Maldutis gave the outlook, concurring with Becker. "Oil at $50 to $60 a barrel will help most airlines produce profits or break even," he said. "Oil at $60 to $70 per barrel will keep the airlines' financials roughly on par with 2005. Oil at $70 to $80 per barrel will produce a slide into financial oblivion for some."
While fuel keeps the domestic industry in the red, there are signs of recovery. Capacity is down, demand is up and load factors are at a six-year high. ATA said last year brought 11.5 million departures, 738.6 million passengers resulting in a 77.6 percent domestic load factor.
"They've done a lot of what they can do. They've cut down on on-board amenities, started charging for skycaps, lowered the baggage allowance and they've made a lot of adjustments in an effort to raise money to get through this," according to The Benchmark Co.'s Becker. "The big one is raising revenue, which they finally started to do by raising prices. That's been a big help in certainly the second half of 2005 and into 2006. As fuel costs continue to go up, the revenue still lags behind fuel cost increases, but it's not as bad as it was a year or year and a half ago."
With carriers citing high fuel expenses as the major barrier to profitability, they increasingly are sharing the expense with the customer in the form of both fare increases and additional fuel surcharges, the latter of which are being raised by many carriers on international long-haul routes.
Though average domestic airfares beginning early last year have inched upward quarter by quarter, 2005 represented a new six-year low in annual averages. According to the most recent quarterly American Express Business Travel Monitor, domestic fares last year averaged $216 per way, compared with a $259 average in 2000.
Although carriers have been able to push through a series of fare hikes in recent...
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