The risk of failure is huge and the list of failures is growing in the airline sector.
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 theChapter 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.
2 comments:
It dose not come as a surprise that the airline industry is doing poor. Them along with every other industry it seems like, maybe next we will be reading about a bailout for airlines. It is interesting to realize they are seeing huge losses from having hedged their oil prices, that just shows you never know what will happen to prices.
It's interesting that earlier in the semester, someone posted an article about how Southwest's hedging practice allowed them to pay less for oil when the price of it hit the roof. Now hedging deals are hurting airlines due to extremely low oil prices. It's a good example of the risks involved in hedging prices, especially during volatile times. I don't know if the rapid drop in oil prices could have been foreseen.
It seems like Chapter 11 is a form of soft-budget constraint, in which the government protects airline companies from bankruptcy. In class SBCs were often seen in critical light because it would keep inefficient industries alive, but maybe in this case it is necessary? I'm not really sure. I definitely don't want any of the airline companies to fail, because that would mean more jobs lost, higher fares, difficulty of travelling, etc. Hopefully the holiday season helps somewhat.
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