Friday, August 08, 2008

Aviation Industry: Fuel Costs Force Airlines to Close Operations

From Aloha in Hawaii to Alpi Eagles in Italy, from promising upstarts like Silverjet to legends like Aeropostal of Venezuela, more than two dozen airlines have fallen off the international radar screen this year.

Some filed for bankruptcy protection. Others have sharply reduced operations or limp along as charters.

While each struggled with its own set of circumstances, the toll of 25 airlines - three to four times the number that the International Air Transport Association normally registers in a year - has mounted as oil price shocks roiled the industry. Among them, 17 have ceased operations altogether.

"Each region has its own challenges but the common denominator in the last six months is the price of oil," said Anthony Concil, a spokesman for the association.

"If the business is not doing well, the price of oil is the critical factor in pushing these carriers out of business."

Even airlines on firm financial footing are running into problems. Soaring fuel costs have driven Cathay Pacific Airways, based in Hong Kong, to a first-half loss, and the two main Japanese carriers are considering cutting routes.

Last month, the Australian flag carrier Qantas announced plans to shrink its workforce by 4 percent and canceled growth plans in what amounts to its fifth effort to rein in costs in three months. It has already increased fares and reduced capacity twice.

The second-biggest Australian airline, Virgin Blue, has also announced plans to cut capacity by about 3 percent, on top of a 6 percent reduction already planned for its 2008-9 financial year as rising fuel costs hurt business.

Among the severely devastated carriers is Aeropostal, a South American airline with a nearly 80-year history of surviving everything from a hijacking, fatal accidents, a three-month strike and the Depression.

But this year, Aeropostal, the Venezuelan airline whose predecessor's daring flights over the Andes inspired a 1939 movie by the American director Howard Hawks, ran into severe financial difficulties, a casualty of business regulations that tied its hands while fuel and other costs inexorably rose. It now operates a handful of domestic flights.

Descended from the airline founded by the French in 1929 to carry mail across the Atlantic, Aeropostal this year became one of 25 carriers that International Air Transport Association, or IATA, said could not pay their bills to an IATA clearing system have ceased scheduled operations since January.

The IATA financial system clears ticket sales for 450 carriers - most of the world's major scheduled airlines. About half of the global aviation industry's $480 billion turnover passes through the settlement system. Most of the rest is managed directly between airlines and passengers.

When an airline ceases payments or discontinues operations, it is removed from the IATA network, giving the association the best overview of the industry's health.

The IATA list does not include airlines like Oasis, a long- distance budget carrier that sold tickets directly to the public without IATA's involvement. Oasis, based in Hong Kong, went into bankruptcy in April. Such examples suggest that the roll call of grounded airlines could be longer still.

As for Aeropostal, "we just couldn't get out of the hole quickly enough," Nelson Ramiz, the former chief executive and a leading shareholder of Aeropostal, said by telephone from Caracas.

After cutting its fleet from 28 planes to 5, and halting all international flights except to Miami and a trio of Caribbean destinations, Ramiz gave up.

In January, 12 years after his family bought the airline from the Venezuelan government, he negotiated its conditional sale to new managers for $23 million.

Ramiz said that the airline - made famous by the French aviator Antoine de Saint Exupery, author of "The Little Prince," and immortalized in Hawks's movie "Only Angels Have Wings" - had been hamstrung by currency controls and was not making enough in dollars to cover the cost of refueling in Miami when he made the decision to sell.

While Air France-KLM has raised fares more than 17 times since 2004, fares on Aeropostal's domestic routes have not increased since 2005 even though landing fees, navigational charges and fuel and labor costs have climbed.

Carriers in an oil-rich country like Venezuela, where fuel prices paid by consumers and some businesses are controlled by the government, Ramiz said, are no more immune to the effect of the global oil price surge than other airlines.

"The price of fuel," he said, " goes up here every week based on the price of Brent," a standard oil price benchmark.

Oil prices that reached a peak of $147 a barrel in mid-July have recently fallen below $120, but are still about 60 percent above levels from last year. This, plus a credit crunch that is slowing economic growth and demand for aviation, particularly in the United States and Europe, has produced a whole new operating environment for airlines and put fragile balance sheets under enormous strain.

No region or type of airline has been spared. Trans-Atlantic business class-only operators like EOS, MAXjet and Silverjet have gone under alongside national flag-carriers like Cameroon Airlines in Africa.

Giovanni Bisignani, the IATA chief executive, warned this week that the aviation industry could lose $6.1 billion this year, compared to the $5.6 billion profit it made in 2007.

"Falling demand and rising costs," he said, "are reshaping the industry."

Originally published by The New York Times Media Group.

(c) 2008 International Herald Tribune. Provided by ProQuest Information and Learning. All rights Reserved.

Fuel Costs Force Airlines to Close Operations
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