Moody’s: US airline business model unsustainable
06.07.08
In a deeply pessimistic assessment of the American airline industry, credit rating agency Moody's has described the business model of US airlines as ‘unsustainable,’ the Times reports, citing a research note from the company. In it the agency's analysts say US airlines are particularly vulnerable to high oil prices and even large airlines could be forced into bankruptcy.
US airlines collectively lost about $2 billion (£1 billion) in the first quarter of this year and they are reducing capacity to cut their losses. They are suffering most as they have fleets of very old aircraft. These use about 40% more fuel than the latest generation of planes and therefore cost substantially more to fly. Thousands of jobs are expected to go when at least 10% of scheduled flights are cancelled later this year.
Moody's said with many airlines seeing a more than 30% year-on-year increase in their fuel costs, with nearly 50% of an average fare consumed by fuel, they are left with inadequate funds to cover other key costs such as labour, equipment rentals, debt service and overhead, the newspaper added.
Moody's said: ‘Without an ability to cover costs and earn an adequate return, the business model for most airlines cannot be sustained under current fuel price conditions.' It added that airlines will not be able to cost-cut or capacity-reduce their way back to profitability, and long-term industry viability will depend upon a pricing environment in which airlines can adequately recover the significant costs of fuel, labour and capital investment.
However, airlines are struggling to increase fares in the face of slowing economies in the US and UK. The worsening economic situation on both sides of the Atlantic means that passengers have less money to spend on travel, so higher fares may encourage them to stay at home, as BA has already seen in its latest passenger figures, further worsening the airline's problems.
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