Feeling the pinch

This week has seen the impact of the oil price crunch. Airlines reporting their quarterly earnings are squealing at the price of aviation fuel and are cutting capacity. This is bad news for airports and will quickly feed through into fewer passengers and lower profitability across the board.
 
In Asia, Qantas says it will lay off staff, implement an executive pay freeze and trim capacity by about 5% across its domestic and international networks to help offset recent fuel prices. Air New Zealand has reduced its profit guidance blaming the price of jet fuel. Cathay Pacific warns that it may have to make strategic adjustments to alleviate the damage fuel prices are inflicting on longhaul demand.
 
In Europe the situation is equally bad, but in North America it’s dire.

Ticket price inflation
 US domestic airfares have risen on average 16% this year and there are more ticket price rises to come as carriers try to compensate for fuel prices that are up 80% from a year ago. As crude oil prices hit US$134 a barrel and look to rise further, the pressure is rising in airline boardrooms still reeling from the credit crunch and the associated steep economic slowdown.
 
Airlines typically spend about 40% of their operating costs on fuel at today’s prices, up from about 25% a year ago.
 
The worry is that the triple whammy of oil price inflation, the credit crunch and recession will lead to a slowdown in business travel, the lifeblood of many airlines and airports. Data from travel associations point to only a limited reduction in leisure travel and this section of the travelling public are taking shorter trips but haven’t cancelled their holiday plans.
 
Businessmen, however, are a different matter.

Cutting business travel
 Corporations across the US and Europe are cutting business travel budgets and in the hard-hit financial sector the downturn is steeper. After the 11 September 2001 terror attacks airlines saw a big downturn in business travel.

When the technology bubble burst at the start of this decade, it had a similar effect and it took airlines years to claw back and recover from these knocks.
 
Already schedules are being cut with American Airlines saying its will reduce its domestic flying schedule by about 11% and ground older aircraft. Analysts suggest that US capacity needs to be slashed by more than 20% for airlines to remain profitable.
 
Airlines are cancelling orders for new jets with Europe’s Airbus saying it expects more orders to be lost due to the fuel price, particularly with its A320 model.

Long-term outlook 
Even more frightening is the prospect of a prolonged recession with jet fuel prices remaining high for the foreseeable future. Many airlines have sufficient cash in hand to last out 2008 even though they will collectively lose billions of dollars. If the current dire economic situation lasts until 2009, however, then there will be casualties, as British Airways boss Willie Walsh reminded the industry earlier this week.
 
How does this affect airports? BAA, the troubled operator of London Heathrow and six other airports in the UK is already feeling the pinch. Net retail income per passenger slipped to £4.18 compared to £4.22 a year ago in its results, a sign that consumers are cutting back on spending at its airports.
 
Add in fewer passengers as airlines slice capacity and cut routes and income will drop, particularly at smaller and secondary hubs. It’s going to be a tough year for the industry.  

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