Page last updated at 22:54 GMT, Thursday, 28 August 2008 23:54 UK

Will more airlines go under?

ANALYSIS
By Simon Atkinson
Business Reporter, BBC News

Oasis plane at Hong Kong international airport on Wednesday 25 October 2006
Oasis - which offered London to Hong Kong flights from 65 - lasted less than 18 months

It is becoming an all-too familiar tale.

An airline says that it is in financial trouble. Before long its planes are grounded.

Passengers are stranded and scramble for seats on other flights. Efforts to revive the business fail. Air crew lose their jobs.

UK-Canadian carrier Zoom is just the latest to find itself facing this prospect as it suspends its flights.

Its co-founder admits that he "does not hold much hope" of finding the investors needed to rescue the airline.

And if it does go to the wall, its name can be added to those of Silverjet, Oasis, Eos and Maxjet - carriers which have gone under in the past year.

Dangerous times

Some said that Zoom's apparent demise was inevitable and indicative of the times.

And the aviation industry is full of speculation that other carriers are in trouble.

Experts are unwilling to name names, doubtless because this could undermine confidence in carriers.

Silverjet plane and crew
Silverjet was another carrier hit by high fuel bills

But there are rumours of some airlines being told they have to pay in cash, upfront, for things such as air traffic control fees and fuel - such is the lack of faith held in the soundness of the carriers.

And this is a dangerous time of year for the more vulnerable airlines.

As businesses they rely on having a strong cash flow.

In recent months they have been collecting ticket money from people booking their summer holidays.

But as that peak period comes to an end, it is a less busy time with fewer passengers looking to travel - a position exacerbated by the wider economic slowdown with many putting off non-essential travel.

Meanwhile, the carriers still have their overheads: staff to pay, planes to lease, airport costs to cover.

And then there is the biggie: the fuel bill.

Oil prices may have come down a little from their highs of close to $150 a barrel in July, but they are still about twice what they were a year ago.

There is widespread agreement that the big, low-cost airlines in the UK - the likes of Ryanair, Easyjet and BMI - are well-financed and in no danger

And essentially, this translates to a doubling in the price of jet fuel.

So when new airlines have taken off on the back of a business models that price fuel at half the cost you are actually facing, , well, you can see the problem.

Zoom, a relatively small carrier, says its fuel bills have increased by $50m (27.3m) in the past year.

When you are flogging a single ticket from London to Canada at 99, covering those sort of cost increases is going to be nigh on impossible.

Likewise, Oasis said that a 60% rise in its fuel bill was the reason for its ultimate demise.

Its super-cheap tickets (London Gatwick to Hong Kong for as little as 1,000 Hong Kong dollars ($128; 65) each way) meant that it spluttered badly when costs surged.

Managing overheads

With oil still at about $120 a barrel - and not tipped to fall dramatically anytime soon - what, or who, will be next?

There is widespread agreement that the big, low-cost airlines in the UK - the likes of Ryanair, Easyjet and BMI - are well-financed and in no danger.

Zoom plane
Many analysts believe other carriers will follow Zoom's demise

These carriers - and the likes of British Airways and Virgin Atlantic - have been tinkering with their routes, though.

This has included cutting back on flights over autumn and winter as they try to ensure that their overheads are controlled and their planes are as full as they can manage.

One analyst, Chris Yates, says that newer long-haul budget carriers are most vulnerable because their margins are so small - especially with the economies of many countries beginning to unravel.

Oasis, Silverjet and Zoom all fell into that category.

Other low-cost airlines elsewhere in the world could go to the wall too, he says.

And it seems inevitable that there will be more consolidation between carriers - allowing them to spread some of the overheads.

British Airways and American Airlines are hoping to get permission for a tie-up. BA also hopes to link up with Iberia.

Arguably the latest development with Zoom adds weight to their argument that such deals need to happen if airlines are to continue to operate on some routes.


RELATED INTERNET LINKS
The BBC is not responsible for the content of external internet sites


FEATURES, VIEWS, ANALYSIS
Has China's housing bubble burst?
How the world's oldest clove tree defied an empire
Why Royal Ballet principal Sergei Polunin quit

BBC navigation

BBC © 2014 The BBC is not responsible for the content of external sites. Read more.

This page is best viewed in an up-to-date web browser with style sheets (CSS) enabled. While you will be able to view the content of this page in your current browser, you will not be able to get the full visual experience. Please consider upgrading your browser software or enabling style sheets (CSS) if you are able to do so.

Americas Africa Europe Middle East South Asia Asia Pacific