Page last updated at 00:04 GMT, Thursday, 6 November 2008

Is the worst over for the airlines?

By Tom Symonds
Transport correspondent, BBC News

The risk of failure is huge and the list of failures is growing in the airline sector.

Alitalia aircraft
The list of airlines in trouble represents a lot of pain

First to succumb were the airlines with innovative new business models, such as Silverjet with its mission to undercut the major airlines in the battle for business passengers.

Small operators like Futura, Sterling, Maxjet, Oasis and EOS have also gone.

The collapse of XL was a huge shock to the UK charter airline market.

Even a flag-carrier, Alitalia, is in administration

Times are even harder in the massive US aviation market.

Southwest, the innovative low-cost airline that spawned imitators such as Ryanair, the European airline, has announced its first financial loss in 17 years.

Of the other Big Six, American, Continental, Delta and NorthWest were all in the red for the last three months' reported figures.

Below them a host of smaller operators have disappeared.

But the US has a system for propping up ailing companies and airlines have made full use of the Chapter 11 protection from bankruptcy to enable them to restructure or merge, and secure their futures.

This week aviation industry representatives were saying they thought the worst was over.

All this is happening, partly because of the "credit crunch".

But the spike in oil prices has been the biggest problem.

The rise started in December 2006 and only stopped in June this year when a barrel of oil had topped $140.

It has now dropped like a stone to just above $60 a barrel.

That won't help many airlines just yet.

They are still paying more for their fuel under 'hedging' deals, in which they set a fixed price months into the future. United Airlines, for example, has said it is around $230m out of pocket as a result of its hedging deals.

Just this week Cathay Pacific has admitted its hedging will result in poor results by the end of this financial year.

Waiting in the wings

Because of the drop in oil prices answering the question "who's next" to go under, is not easy.

Airline passengers
The rush to the gates may not last through a recession

But despite the optimism in the US, many believe it is not over yet.

Take aviation's loudest voice, Ryanair's Michael O'Leary.

On Monday he told the BBC: "What we're seeing is the market being cleaned out. I think its going to get a lot worse this winter. I expect to see another five or six airline bankruptcies in Europe before Christmas".

Which might he have meant?

Mr O'Leary was quoted in newspapers naming Germany's second biggest carrier, Air Berlin as one possible airline at risk.

"Nonsense," said Air Berlin.

What about the UK operators?

The regional operator FlyBe was still in profit last time it reported and its now taken over the British Airways BA Connect service.

But FlyBe has less cash in the bank than its rivals Easyjet and Ryanair. But it's upbeat, talking even of expansion.

Cash reserves seem to be an important factor.

Ryanair, for example, has more than 1bn in the bank, a healthy safety net by any standard.

Which means that the airline can afford not to hedge its fuel purchases.

Ryanair is also sticking to its mantra, when the going gets tough, sell more seats for almost nothing.

BMI has surrendered to a take-over from Lufthansa, which should secure its future.

British Airways is concentrating on business travel, and hoping the white-collar economic downturn does not mean trouble round the corner.

BA is also trying join with its friends to weather the story.

The "almost-a-merger" deal with American Airlines and Iberia, which should help in the transatlantic market, will be one of the transport-related decisions of President Obama.

Taught nerves

It may be that the worst is over.

Check-in queues
Expect queues if another airline collapses

That most of the airlines that were going to collapse, have collapsed.

Some industry-watchers say it is the companies with an over-reliance on keeping costs down that will face the greatest risk.

Theoretically, if the oil price stays low, they should become more secure.

Others suggest that it will be smaller, privately-owned airlines that run into trouble, because they don't have cash reserves, or the sturdy framework of shareholders and investors to keep them out of trouble.

Certainly the biggest risks face the newest entrants to the market.

Perhaps some of the Ryanair-wannabes that have sprung up around Europe.

But if the recession really starts to bite, people will stop booking expensive holidays, and businesses will cut trips abroad for meetings.

This could replace oil prices as the big headache and damage airlines further.

Though it could also help budget operators as travellers look for cheaper deals.

But naming the names of Europe's shakiest airlines is not legally advisable.

Recently, when rumours surrounded the financial health of one smaller UK airline, my inquiries to industry sources resulted within hours in a call from the airline in question.

"We've heard you're calling around. It's going to damage us. What do we have to say to convince you we're not in trouble".

A poignant illustration of the taut nerves in the aviation world, as this global slump lingers on.

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SEE ALSO
Fuel costs dent Ryanair profits
03 Nov 08 |  Business
EU rules warning on Alitalia deal
02 Nov 08 |  Business
Delta and Northwest seal merger
30 Oct 08 |  Business
BMI being taken over by Lufthansa
29 Oct 08 |  Business
Icelandic-owned airline bankrupt
29 Oct 08 |  Business
Airlines hit economic turbulence
23 Oct 08 |  Business

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