High oil prices hit low-cost carriers especially hard
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ISTANBUL: It is not only the major airlines that are feeling the pain as jet fuel prices climb.
A number of low-cost carriers that helped democratize air travel in Europe, the United States and Asia over the past decade have been left particularly vulnerable: They operate with already wafer-thin profit margins and a heavier dependence on people traveling for fun rather than business - trips that people are quicker to forgo when money is tight.
And like their larger, long-haul competitors, only the leanest and strongest budget airlines look likely to survive.
"The good times are over," Stephen Ridgeway, the chief executive of Virgin Atlantic Airways, said during an interview on Tuesday. "There will be no more hen parties in Latvia," he said, referring to the kind of group excursions to inexpensive locales that low-cost airlines popularized.
Brian Pearce, chief economist of the International Air Transport Association, or IATA, calculates that oil prices at $106 a barrel on average represent 34 percent of the total operating costs for many airlines. But in the budget airline sector, fuel costs represent nearly 50 percent, he said.
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Ryanair, one of the pioneers of "no frills" air travel in Europe, said Tuesday that it would raise ticket prices and baggage charges to help make up for record fuel costs. It also said it planned to eliminate some call-center jobs and freeze salaries.
The Irish airline reported that it lost €64 million, or $99 million, in the quarter ended March 31 - a figure largely due to a €91.6 million write-down on its stake in Aer Lingus, the Irish flag carrier.
Sales rose 21 percent to €590 million. And the chief executive, Michael O'Leary, predicted that the carrier would stay profitable this year, sending the airline's shares up 10 percent.
"There is demand for no-frills services, especially for the short haul," said Pearce of IATA, which is holding its annual meeting in Istanbul. "It is not the end of the low cost model, but it may be the end of low fares for a while."
In Europe, high oil prices have already pushed up some of the lowest airfares, with a number of routes cut and more likely to go, said John Strickland, managing director of the air transport consulting firm, JLS Consulting, which is based in London. The weakest surviving players will go bankrupt or be forced to merge, he predicted.
"The legacy sector in Europe has gone through a consolidation," he said, referring to national flag carriers. "Now it's the turn of the low cost carriers."
Globally, the major areas of weakness have been the United States, Britain and trans-Atlantic markets, Morgan Stanley analysts said in a recent research report on European airlines.
"However, we are seeing signs of this weakness spreading into Continental Europe and parts of Asia, " according to the report. "For now demand appears to be holding up well to Latin America, Africa and the Middle East."
In the past six months, at least a dozen airlines have failed as oil rose toward its record last month of just over $135 a barrel.
Among the European carriers that have been swallowed or ceased trading in recent years are Buzz, which was bought by Ryanair; Go, bought by EasyJet; FlyMe; Air Madrid; Air Polonia; and V Bird. The Spanish low-cost airlines Vueling and Clickair are reportedly in talks over a combination.
In the United States, Frontier Airlines, ATA, Skybus and Aloha Airlines have all filed for chapter 11 bankruptcy protection this year.
In India, the shares of the three major listed airlines - Jet Airways, Deccan Aviation and SpiceJet - have dived by up to 65 percent this year. Domestic fares have barely moved as fuel prices have soared.
Oasis Hong Kong Airlines, which operated routes linking Hong Kong with London and Vancouver, British Columbia, ceased operations on April 9.
But others in the region have held on. Analysts cite Tiger Aviation, which is based in Singapore and partially owned by Singapore Airlines, and AirAsia of Malaysia as relatively well positioned. They may in the future be able to extend their routes to Northeast Asia, including Japan and South Korea, where few budget flights are available.
In Europe, industry experts and executives predicted that those budget airlines in Europe with strong balance sheets, desirable slots and loyal passengers - the names most often cited are EasyJet, Ryanair and, probably, Air Berlin - would hold on.
"In Europe we have a couple of low-cost carriers with good margins," said Giovanni Bisignani, the head of IATA. "Around three or four majors will consolidate the others that can't face this emergency situation."
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