Airline Group Sees ‘Desperate’ Times - 060308 NY Times

It sure was fun while it lasted! RK

"In the next 12 months we could face $99 billion in extra costs from oil.”

http://www.nytimes.com/2008/06/03/business/worldbusiness/03air.html?pagewanted=print

June 3, 2008
Airline Group Sees ‘Desperate’ Times
By CAROLINE BROTHERS and MATTHEW SALTMARSH
ISTANBUL — Citing high oil prices and the slowing economy, the International Air Transport Association on Monday sharply lowered its industry forecast for 2008, saying it now expected a collective loss of $2.3 billion.

In March, the group had forecast a profit of $4.5 billion.

At its annual meeting here, the association urged governments to roll back regulations that they argue are damaging the industry at a time when many carriers are in a “desperate” situation.

If price of oil, which is now just below $130 a barrel, averages $107 over 2008, the aviation industry would lose $2.3 billion for the year, the chief executive of the group, Giovanni Bisignani, said. Should it hold at $135 a barrel for the rest of the year, the industry will lose $6.1 billion.

“After enormous efficiency gains since 2001, there is no fat left and skyrocketing oil prices are changing everything,” Mr. Bisignani said. “The situation is desperate and potentially more destructive than our recent battles with all the Horsemen of the Apocalypse combined.”

Other problems facing the airlines, the group said, include uncertainty about the approach by the European Union and governments toward state aid and airline mergers.

The chief executive of British Airways, William M. Walsh, said: “We’re definitely as an industry in a crisis situation. With a softening in the economic environment, high oil prices, it’s inevitable that fares have to go up.”

Mr. Walsh added that he expected to see additional bankruptcies soon.

John Leahy, chief operating officer of the European plane maker Airbus, said that the sector could adjust to higher fuel prices “but it will take several years, and how many will be left standing?”

Hartmut Moers, an analyst at the bank Sal. Oppenheim in Frankfurt, said “The key short-term question is who is best hedged against the oil rise.”

“And then further out,” Mr. Moers said, “you look for the airlines with robust operations, the flexibility to adjust and the ones that are best capitalized.”

In Europe, that probably means the strongest are the biggest — Air-France-KLM, British Airways and Lufthansa. The situation in the United States appears more complicated given difficulties of integrating different carriers and the weak dollar, which makes oil even more expensive.

Consolidation is the obvious solution, Mr. Moers said, but “there are more obstacles than you might think.”

In the United States, Delta Air Lines and Northwest Airlines said in April that they planned to merge. But last week, United Airlines and US Airways suspended merger talks. In Europe, Air-France back away from acquiring Alitalia of Italy. And in December, long-running talks by a consortium to buy Iberia of Spain collapsed.

Mr. Moers said that government support would be needed if a number of flag carriers are to survive. “It’s very hard for any government to let an airline go bankrupt,” he said, “and that is the scenario if nothing happens.”

One possibility, analysts said, is a resurrection of trans-Atlantic deals, provided antitrust rules are softened.

But Mr. Walsh of British Airways opposed government aid to support struggling flag carriers.

“If they were struggling with $65, $70, $80 dollar oil, I don’t see how they can survive.” Mr. Walsh said.

For its part, British Airways announced in May that it was “exploring opportunities for cooperation” with the two airlines in the United States, leading to suggestions that it would extend its OneWorld alliance with American Airlines to include Continental.

British Airways and American, a unit of the AMR Corporation, have failed to get an exemption from American antitrust laws to work more closely because of their dominance at Heathrow airport in London.

‘Things have changed” Mr. Moers said. “We now have the ‘open skies’ agreement. I’m not sure that we would see the same stringent conditions of such a move as before.”

At the industry conference, Mr. Bisignani said: “Twenty-four airlines have gone bust in the last six months and $130 per barrel oil is reshaping the industry even as we speak. In the next 12 months we could face $99 billion in extra costs from oil.”

He said governments must “stop crazy taxation, regulate monopolies effectively, ensure that the cost of energy reflects its true value, fix the infrastructure and change the rules of the game.”

“Labor must understand that jobs disappear if costs don’t come down,” he added.

In particular, he criticized the European Parliament for imposing 100 amendments an emissions trading proposal.

“We face a bill of 6.4 billion euros for a misguided and unilateral proposal that will inspire international legal battles but do very little for the environment,” he said. “These are reckless decisions when the industry is in crisis and oil prices have changed the game completely.”

Mr. Bisignani called for governments to develop an emissions trading scheme that is fair, voluntary and global. And he urged financing for innovation for biofuels and new generation engines and airframes.