Soaring fuel costs pile pressure on airlines

Published: 12 Jun 2008

As the aviation industry grapples with the spiraling fuel costs, more US airlines need to go out of business and the price of tickets must rise much further, according to the chief executive of Virgin Atlantic Airways.

According to Reuters, Virgin Atlantic Chief Executive Officer Steve Ridgway, carriers are going to go out of business and need to go out of business.

"We can't just keep up this merry-go-round of propping them up," he said.

"Ultimately the industry is going to have to re-price," said Ridgway, meaning that ticket prices will have to rise. "That will have an effect on demand and that will ultimately have an effect on capacity balance."

Ridgway said London-based Virgin's strong fuel hedging positions and solid cash reserves mean it's well-placed to ride out the current crisis. He said the company, which is closely held, may face opportunities to expand, possibly through acquisitions, or to join with a bigger group.

Last year Virgin set up a domestic US airline, Virgin America, but cannot own any more than 25% of it due to laws unique to the US airline industry. If the industry is going to develop, those rules must be cast aside, reportedly said Ridgway.

"It's crazy that the industry which made the global economy possible is still sitting there with all these shackles and all this inefficiency," he said. "Can you look at their system and say it's worked brilliantly?"

In the recent past, John McCulloch, oneworld's managing partner, has also indicated that the ownership laws, which restrict foreign carriers to 25% of the shares in US airlines and in the EU to 49%, would have to change as the airline industry focuses on mere survival over the next year.

Recently, IATA said its member airlines faced losses of 2.3 billion dollars this year due to soaring fuel costs, dramatically reversing a forecast of profits nearly twice that figure.

"The industry is in crisis, perhaps the biggest crisis we have ever faced," said IATA secretary general Giovanni Bisignani. He warned that losses this year could total 6.1 billion dollars if oil stays around 135 dollars a barrel. The figure of 2.3 billion dollars was based on oil averaging 106.5 dollars over the year.

Comments

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mediamanoz said on 15 Jun 08:

That's the commercial reality of the situation. If they are not sustainable, let them die. Ridgway via Branson is involved in other businesses outside aviation, so that's a major advantage, especially in these volatile times.

Kilgore said on 13 Jun 08:

I have read that as much as 40 percent of the current cost of oil is due to speculation. I have no idea how accurate that figure really is, but certainly some of the rapid increase in the price of oil is due the commodities traders.

Yesterday, there was news that a dispute has developed between New York and London as to the wisdom of daily price limits on oil futures contracts. In New York, the Commodity Futures Trading Commission wants limits while in London the Financial Services Authority is resisting. On this issue, I think the Americans are finally taking a step that could alleviate the problem.

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