Fuel Crisis – How Airlines are managing

The airline industry is facing a multifaceted economic crisis: rapidly rising fuel costs, the U.S. economic slowdown, and difficulty raising capital for operations. Major airlines have responded by reducing service on some routes, abandoning service on others, idling planes, raising fares and other charges, and laying off personnel. As a result, consumers face higher travel costs and fewer options.

Oil is becoming scarcer and harder to produce. Several former big areas of oil production are in decline while other top oil-producing countries, including Nigeria, Russia, Saudi Arabia, Iran and Venezuela, are either unwilling or unable to lift production. Chinese demand is expected to more than double by 2030. Hedge funds and investment banks have been placing big bets that oil prices will continue to rise, amplifying the volatility in prices. The head of Opec and Goldman Sachs have said that prices could rise to $200 per barrel but other industry players have said that they are baffled by current prices because, despite the pressures in the market, there is still sufficient oil to meet global demand. High prices are also stimulating a frenzy of investment in new fields previously considered too small, expensive or geologically challenging to extract commercially. This could have a dampening impact on oil prices when more of these enter production. But production simply cannot continue to grow indefinitely. By 2035 the world will use more than twice as much energy as it does today and demand for oil could rise from 85 million barrels a day to more than 120 million barrels.

According to the Air Transport Association major carriers are expected to spend more than $61 billion on jet fuel in 2008, compared with $41 billion in 2007. That difference is enough to bankroll 267,000 airline jobs or 286 new narrow-body jets. As a result, airlines are expected to lose a combined $7 billion to $13 billion in 2008, or $10.89 per passenger. As recently as in June this year, US Airways said that its fuel expense for each round trip passenger averages USD 299 that was USD 151 in 2007. An average one-way ticket on American Airlines these days runs USD 221, compared with USD 206 in 2007, but the cost of oil per fare has risen to USD 107 from USD 32 in the same period. Delta Airlines projects its 2008 fuel cost to accelerate by USD 4 billion, it expects that its own operations will cover just 75% of that increase. The airline is in the midst of merger agreement with Northwest Airlines that may help it in stemming some of these expenses. British Airways, which is one of only 14 airlines in the world with a profit margin of more than 10%, has admitted it could move from a profit of £883m to a loss over the next two years despite its robust cost base and balance sheet. Fuel now accounts for 35 percent of British Airway's overall costs - compared to just 10 percent 12 months ago. The rest of the British airlines industry is less resilient and operates on an average profit margin of just over 1%, underlining the threat posed by a sudden spike in fuel costs.

Survival Strategies

#1 Fare Hikes

According to study by Airline Forecast, a consulting firm, all of the major US airlines could be in bankruptcy by early next year if oil prices remain where they are. The study found that if fuel prices remain high the top 25 airlines would spend over USD 25 billion more for fuel this year. And the major airlines could lose up to USD 9 billion over next 12 months. The study found that fares would have to increase 20% across the board to compensate for the higher costs. Raising fare is precisely what the airlines have been doing ever since fuel crisis overtook the industry. US airlines have raised fares 14 times this year; whereas, the Australian airlines Qantas in May 2008 raised its fare for the second time in less than a month. According to the latest data released by the Bureau of Transportation Statistics average US domestic air fares in the first quarter of 2008 were up 4.4 percent from the first quarter of 2007 being the largest year-to-year increase since second quarter 2006. The average domestic itinerary fare in the first quarter of 2008 of $332 was the highest average fare since the second quarter of 2006.

US Airfare Hikes 2008 - Timeline

Year	Airfare Hike Attempts	Airfare Hike “Successes”	Attempted Base Airfare Hike Attempts	Attempted Fuel Surcharge Hike Attempts	Initiated Most Hikes
2008	21	15	10	11	United (10)
2007	23	17			United (7)

Lufthansa, the German flag carrier and the largest airline in Europe in terms of overall passengers carried, has raised fuel surcharge on all its flights as a means of coping with the soaring costs of crude oil and kerosene, the recent increase was on 16^th July. Singapore Airlines, the national airline of Singapore, has so far on five occasions increased the fuel surcharge on all its flights owing to rising fuel costs. On several international routes, the fuel surcharge compared to last summer has more than doubled. Listed below is a comparison chart of fuel surcharges in summer 2007, spring 2008 and the current fuel surcharges by most major airlines that offer international service from the United States.

Destination	Summer 2007 Fuel Surcharge (Roundtrip)	Spring 2008 Fuel Surcharge (Roundtrip)	Summer 2008 Fuel Surcharge (Roundtrip)
Most European cities including Amsterdam, Athens, Madrid, Moscow, Paris, Prague and Rome	$150	$270	$330
United Kingdom (London, Manchester and Glasgow) from most Eastern U.S. cities	$130	$242	$302
United Kingdom (London, Manchester and Glasgow) from most Western U.S. cities	$130	$306	$426
Beijing, Manila and Tokyo	$180	$270	$340
Most German cities including Berlin, Frankfurt and Munich	$150	$210	$180
Hong Kong	$180	$270	$340
Honolulu	$18	$130	$260
Most Mexico cities including Mexico City, Acapulco, Los Cabos and Puerto Vallarta	$80	$120	$140
Rio de Janeiro	$56	$170	$210
San Jose, Costa Rica	$130	$250	$290
Santiago, Chile	$130	$310	$390
Sydney	$70	$230	$220

In May this year Air Canada introduced fuel surcharge on its domestic flights for the first time in four years. The surcharges were in addition to ones already in place for international flights. The price hikes were:

• $40 for return flights of less than 480 kilometres

• $80 for return flights between 480 and 1,600 kilometers

• $120 for return flights longer than 1,600 kilometers

Air New Zealand raised domestic and short haul international fares by an average 3% in May this year. It also decided to replace Boeing 747 planes on its service to London through Los Angeles with more fuel efficient Boeing 777s. Emirates Airlines has announced that its tickets would rise by 10 percent for first and business class, and five percent for economy class from August 1.

# 2 Schedule/Flight/Route Rationalisation

This is the second most frequent step being taken by the airlines to fight fuel crisis. Airlines have taken to grounding of aircraft rather than fly on uneconomic routes. The US airlines were the first to take the lead in this direction and they have been followed by airlines elsewhere in the world. In the face of a 21% rise in its fuel costs this year budget carrier Virgin Blue has cut some domestic routes and raised fares by an average $5 across more than half its routes. Virgin also decided to take four jets from the domestic market; cuttings planned capacity growth for the next fiscal year by 6%, and redeploy some planes out of loss-making services into new or more attractive markets. Qantas has blamed the relentless rise in fuel prices for the first major cut in its services since the SARS crisis hit the airline industry five years ago, after announcing plans to retire and ground some of its domestic aircraft from July. Qantas has also announced its plans to exit several low-yielding routes, including the Sydney-Gold Coast route in order to cut costs. According to Qantas the domestic cuts equate to the grounding of six jets. American Airlines, the world’s largest carrier, plans to cut domestic capacity by 12 percent in the fourth quarter of this year. United Airlines will cut domestic capacity by 15 percent in the fourth quarter, slash 1,500 jobs and jettison its low-fare unit Ted. The airline plans to cut mainline domestic capacity by 17 to 18 percent in 2009, while also scaling back international capacity by 4 to 5 percent. Continental Airlines plans to cut domestic capacity by 11 percent in the fourth quarter and retire 67 of its older and least-fuel-efficient planes through 2009. Recently budget carrier Ryanair announced that it planned to cut its number of weekly flights from more than 1850 to just under 1600 this winter. Similar trend is observed in the Asian region as well. At least seven major Asia-Pacific airlines have announced plans to cut flights in the past two weeks. China Airlines and EVA Airways Corp., Taiwan's largest carriers, plan to cut as much as 10 percent of flights. Cathay Pacific Airways has indicated that it might cut some routes, particularly on longhaul North American services, and accelerate aircraft retirement. Thai Airwyas has responded to the fuel crisis by grounding an entire fleet of fuel-guzzling four-engine jets and axing Bangkok-New York flights. Thai also intends to trim its Los Angeles service and will re-route others via Japan using fuel-efficient twin-engine aicraft. SriLankan Airlines has decided that it will be temporarily reducing the number of flights on some routes in its network of 41 destinations in 22 countries in Europe, the Middle East and Asia in response to rocketing oil prices. In India, Air India has withdrawn at least 20 services from different routes from July 1 while Jet Airways, the country's largest private airline, has withdrawn its low-cost subsidiary JetLite from 25 routes. Spice Jet, a Delhi-based low-cost carrier, has cancelled about 10 flights. Kingfisher Airlines has deferred the launch of its international operations from next month to September. Simplifly Deccan, Kingfisher's low-cost unit, has struck off about 48 flights on its short-haul routes. GoAir has cut its flights from 1,000 to about 800 a month. China Southern may cut services on at least 21 international routes, including flights to Hanoi, Paris and Los Angeles. China Eastern, the nation's third-biggest carrier, may trim some long-haul routes.

# 3 Baggage Fees

Baggage fees are fast becoming an unavoidable part of flying. Three of the largest US carriers now charge $15 for a first checked bag. Most U.S. carriers already have instituted a $25 charge for checking a second bag. As of July 1, Southwest Airlines is the only U.S. carrier that permits two checked bags for free.

Now, some carriers charge passengers for all checked luggage, and many have raised their overweight and oversize fees. Even bags that are allowed free of charge must, in most cases, weigh 50 pounds or less, and the sum of a bag's length, width and height must be 62 inches or less. To prevent passengers from dragging big bags into the cabin, some airlines are becoming more vigilant about carry-ons as well. Below are the fees that some major US carriers charge for oversize and overweight baggage, as well as new checked-bag fees and size limits for carry-ons. AirTran

Checked bag fees: First, free; second, $10 online, $20 at airport; third, $50. Overweight bag fees: 51-70 pounds, $29; 71-100 pounds, $69. Oversize bag fees: 62-70 inches, $29; 71-80 inches, $69. Carry-on limit: 55 inches. American Checked bag fees: First, $15; second, $25; third to fifth, $100 each; sixth, $200. Overweight bag fees: 51-70 pounds, $50. 71-100 pounds, $100. Oversize bag fees: 63-115 inches, $150. Carry-on limit: 45 inches and 40 pounds. Continental Checked bag fees: First, free; second, $25; third, $100. Overweight bag fees: 51-70 pounds, $50. Oversize bag fees: 63-115 inches, $100. Carry-on limit: 51 inches and 40 pounds. Delta Checked bag fees: (Domestic) First, free; second, $25; third to 10th, $80 to $180 each. Overweight bag fees: 51-70 pounds, $80; 71-100 pounds, $150. Oversize bag fees: 62-80 inches, $150. Carry-on limit: 45 inches and 40 pounds.

JetBlue

Checked bag fees: First, free; second, $10; third, $75. Overweight bag fees: 51-70 pounds, $50. 71-99 pounds, $100. Oversize bag fees: 63-80 inches, $75. Carry-on limit: 50 inches for Embraer 190 planes, 56 inches for Airbus A320s. Northwest Checked bag fees: First, $15; second, $25; third, $100. Overweight bag fees: 51-70 pounds, $50. Oversize bag fees: (Domestic) 63-80 inches, $100. Carry-on limit: 45 inches. Southwest Checked bag fees: First and second, free; third, $25; fourth and additional, $50 to $110 each. Overweight bag fees: 51-70 pounds, $25; 71-100 pounds, $50. Oversize bag fees: 63-80 inches, $50. Carry-on limit: 50 inches. United (fees effective from Aug. 18) Checked bag fees: (Domestic) First, $15; second, $25; third and additional, $125 to $250 each. Overweight bag fees: 51-100 pounds, $125. Oversize bag fees: 63-115 inches, $125. Carry-on limit: 45 inches. US Airways Checked bag fees: First, $15; second, $25; third and additional, $100 each. Overweight bag fees: 51-70 pounds, $50 to $150; 71- 100 pounds, $100 to $200 (based on number of bags). Oversize bag fees: 62-80 inches: $100. Carry-on limit: 51 inches.

# 4 The Unusual - Things Airlines Are Doing to Reduce Weight (and Save Fuel)

Airlines are doing all sorts of imaginative things to drop pounds off a plane, to save fuel. Some airlines are finding new and novel ways to conserve fuel and face the crisis.

Alaska Airlines plans to replace 16 MD-80 planes with 737-800s, which use 18 percent less fuel. The carrier also began using lighter catering carts last year and is using satellites to fly more direct routes.

American, the largest U.S. carrier, is modifying the tail cones on its MD-80 planes to be more aerodynamic and using beverage carts that are lighter than older models.

For the past few years, American has also used less paint on the outside of planes to lighten the load. Not only can paint weigh down an aircraft (paint can weigh 440 lbs on a 747), it can create drag if chipped, and that consumes more fuel. Cathay Pacific has joined American in peeling paints off its aircrafts.

US Airways is carrying less extra fuel on flights and ordering new aircraft to replace the more fuel-hungry planes. It also is changing speeds while flying to take advantage of strong tail winds or other conditions.

Some airlines, including Delta, are retrofitting planes with "winglets," vertical extensions of wingtips that improve an aircraft's fuel efficiency by roughly 3 percent.

And to avoid wasting fuel by flying half-empty planes, some airlines are flying fewer or smaller jets. Delta, for instance, ended leases on 13 domestic aircraft in the fourth quarter and canceled orders for some aircraft next year.

Southwest figures that, since it began washing some of its jet engines on a nightly basis last April (to reduce “drag” caused by dirt), its saved $1.6 million in fuel costs.

Cathay's fleet is using luggage containers made of Twintex. The new containers are about 50 pounds lighter than the older ones made of aluminum.

Airlines also are trying to cut fuel consumption at the airport. Most now run their planes' electrical systems at the gate by plugging them into outlets, rather than running the engines.

Many jets now taxi out to the runway on one engine, saving full power until in position for takeoff.

Some airlines are changing their landing patterns for certain flights. On red-eye trips into Cincinnati and Atlanta, some Delta jets descend steadily to the airport, rather than following the usual step pattern, which uses more fuel, when airports are busiest

Airlines including Delta are swapping heavier seats for models weighing about five pounds less.

American is replacing its bulky drink carts with ones that are 17 pounds lighter. The airline said that move would help save 1.9 million gallons of fuel a year, on top of the 96 million gallons it is saving through other means.

Japan Airlines is reducing the number of newspapers and magazines on international flights, which achieve a 50-pound reduction in aircraft weight. The Japanese carrier is also using smaller cutlery used on international flights, cutting the weight of each piece an average of 0.07 ounces.

The Ones’ Who Have Escaped the Wrath

While the rest of the world’s aviation prepares for economic storms, Russia’s aviation industry and Gulf carriers seems oblivious to the weather forecast. Aeroflot, still the largest Russian airline and the predominant flag carrier, continues to predict 30% growth this year while sitting on cash reserves of around USD3 billion. And the largest domestic operator, Siberia Airlines passenger numbers were up 26% in the first half of 2008, due first and foremost to the general positive growth trend in air travel on the Russian market, which also grew by 23% overall. Russia’s GDP grew at 8% in the first half, benefiting from high oil prices. Russian carriers handled 22.5 million passengers in the first half of 2008, up 19.9%, including 5 million passengers in Jun-08, up 8.7% and recording growth rate above 20% in the first five months of the year. Aeroflot’s Jun-08 passenger numbers rose 13.7%. In the January to May period (for which detailed data is currently available), total international passenger numbers to/from Russia rose 24% to 7.9 million (or 45.2% of the total), including a 24.8% increase in traffic between Russia and foreign countries outside the CIS and a 20% increase in traffic between Russia and CIS states. Domestic passenger numbers rose 23.7% in the first five months of 2008 to 9.6 million (or 54.8% of the total); the average increase in 2007 was only 18.6 percent.

Middle East carriers grew by some 18% in 2007, nearly more than double than any other carrier. Revenues for the region's carriers in 2007 rose by a quarter, Emirates saw its revenues break the $10 billion mark. It is now among just 16 carriers in the world with revenues at this high water level. Qatar Airways saw its revenues climb a staggering 40% to $2.7 billion last year, while youngster ­Etihad nearly doubled its revenues to $1.5 billion. Furthermore, the gulf airlines are mining fast-growing routes. Passenger traffic between the Middle East and Africa rose 19.8 percent in the five months to June this year, and 14 percent between the Middle East and Far East. That compares with average growth of 4.5 percent for all international routes.

The Middle Eastern carriers are also running a tight ship. During the five months to May, the load factor, or percentage of available seats sold, on the region’s airlines was 74.6, according to association figures, in line with a “high” global average of 75.2. The level means that Middle Eastern airlines are flying as full as their rivals and suggests that they are not emptying their competitors’ planes. But over the longer run, aviation experts feel, airlines like Emirates, which compete on price for the mass market and on service for business travelers, should make some inroads against competitors.

Furthermore, the gulf airlines are mining fast-growing routes. Passenger traffic between the Middle East and Africa rose 19.8 percent in the five months to June this year, and 14 percent between the Middle East and Far East, though from a low base, the association said. That compares with average growth of 4.5 percent for all international routes.

The Middle Eastern carriers are also running a tight ship. During the five months to May, the load factor, or percentage of available seats sold, on the region’s airlines was 74.6, according to association figures, in line with a “high” global average of 75.2.

The level means that Middle Eastern airlines are flying as full as their rivals and suggests that they are not emptying their competitors’ planes.

But over the longer run, aviation experts said, airlines like Emirates, which compete on price for the mass market and on service for business travelers, should make some inroads against competitors.

Emirates recent decision to cancel its service to Alexandria, Egypt and deferment of its plan to have direct flights to Durban, South Africa from Dubai in December because of high fuel costs are perhaps the first sign that Middle East airlines are beginning to take a hit from high oil prices. Until now, no carrier had announced cut-backs on flights or destinations. In fact, many carriers in the region have added one or more routes during the first half of this year.

Gulf carriers have been somewhat immune to high fuel prices largely due to the fact that Gulf region is buoyant economically. People in the region are the ones who are benefiting from the fuel price surge, so they have extra money in their pockets to spend on travel. Gulf airlines are also benefiting from the fact that they are increasingly serving as hubs for travellers across Asia and Europe. Another key factor in Gulf carriers favour is that they tend to have young, modern fleets which are more fuel efficient than older aircraft

Gulf low-cost carriers under pressure

In the Gulf, low-cost carriers have had success in providing services to a price-sensitive customer base made up largely of workers who are travelling home to high population areas. However, the smaller low-cost carriers are under increasing pressure because they don't have the cash reserves to keep their prices low as fuel prices continue to rise. The first low-cost carrier in the region that has begun to feel the pinch of high fuel prices is Sama Airlines. The carrier has had to introduce a fuel surcharge on international and domestic flights to offset some of the cost of the increase in fuel. It has also deferred some aircraft additions to its fleet until the direction in oil prices becomes clear, To help offset high oil costs, the airline has implemented a programme to reduce fuel burn by optimising flight paths and reducing unnecessary weight on the aircraft. So far the airline has not been forced to cut any destinations, but it is taking a close look at its routes.