Bankruptcies seen for major airlines

New study predicts 'darker future' from soaring fuel prices

By Trebor Banstetter | McClatchy-Tribune

June 14, 2008

FORT WORTH, Texas - All of the major airlines could be in bankruptcy by early next year if oil prices stay where they are, a new study predicts.

The grim analysis by the consulting firm AirlineForecasts was commissioned by the Business Travel Coalition. Its author concludes that the airline industry is in a full-blown crisis "and heading toward a catastrophe."

The study found that if fuel prices remain high:

•The top 25 carriers will spend more than $28 billion more for fuel this year.

•The major airlines could lose up to $9 billion over the next 12 months.

Fares would have to increase 20 percent across the board to compensate for the higher costs, something that "is not possible given the level of un-economic seat capacity in the system today." Even though airlines have been raising fares aggressively, they've largely sidestepped routes where they compete against low-cost airlines such as Southwest. The Bureau of Labor Statistics reported that average fares were up about 4 percent during the fourth quarter of last year, the most recent data available.

At least some airlines would be forced to liquidate if there are widespread bankruptcy filings.

"We're in uncharted territory in terms of the magnitude of this," said the report's author, Vaughn Cordle. He pointed out that his analysis was "a snapshot of the current situation," and that things could improve if fuel prices decline or the industry makes moves to stem the red ink.

Still, the study states, "The airlines and their stakeholders have never faced a darker future."

Investors have clearly been worried about possible airline bankruptcies for some time. Shares of most major carriers have fallen substantially in recent months.

However, not all analysts hold a gloomy outlook.

Michael Derchin of FTN Midwest said in a recent report that cuts in capacity, increases in fares, cost-cutting and consolidation will probably help the industry survive.

He wrote: "2009 now looks like a turnaround year, and 2010 a solidly profitable one as actions start to bear fruit, assuming oil prices stabilize at high levels."