High-priced fuel scares airlines

ByABC News
March 25, 2008, 12:08 AM

— -- Like poker players dealt a bad hand, they're trying to act calm, but $100-plus oil is starting to really scare the people who run the USA's airlines.

Record prices for both crude oil and refined jet fuel are threatening to send U.S. carriers spiraling toward deep losses, drastic service cutbacks, job cuts and, perhaps by year's end, an industrywide cash crunch.

A year ago, airline managers were talking about the return of a profits cycle in 2007 that would grow larger this year and extend into 2009 or even 2010. Now, they're grounding and selling planes, trimming service on marginal routes and eliminating it on others where there's no hope of making money. They are cutting jobs, rolling out more service charges and to the consternation of travelers raising fares almost weekly by amounts never seen before. They're also watching their cash balances closely and nervously.

Prolonged oil prices above $110 a barrel could do what all the airlines' long list of problems in the last seven years have not drive one or more out of business. That's a worst-case scenario, however. The government's Energy Information Administration forecasts crude oil prices will average $94 a barrel this year. And airlines have a well-established record of surviving the most horrible business conditions.

That means the USA's air carriers appear headed toward the kind of huge losses they rang up in the post-9/11 years before earning very modest profits in 2006 and 2007. In recent reports, several industry analysts have projected those losses could range from $1 billion to $9 billion.

Low-cost carriers such as Frontier are perhaps most threatened by high oil prices because fuel represents a bigger share of operating budgets, and because they have fewer assets they can turn into cash for survival. But Hodas says triple-digit oil prices are a threat to all carriers. "None of us can sustain $110-a-barrel oil long term; none of us, I don't think," he says. "Whether it's consolidation or the shrinking of capacity, you're going to see more of that (as airlines) deal with these fuel prices."