Simon Evans: If you think things look bad on the ground, it's even worse in the sky

Airlines are in crisis. Expect a merger frenzy and the end of cheap flights
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The Independent Online

Little over a month ago, a respected and very senior private equity boss warned me that the airline industry was destined for meltdown. He said past problems in the sector would pale into insignificance.

That judgement has been proved overwhelmingly right. Things really are that bad. And they are set to get much worse.

Last Friday British Airways became the latest group to issue dire figures. First-quarter profits shed 88 per cent as soaring fuel costs and the disastrous switch to T5 took their toll.

With cheaper oil hedges coming to an end, BA finds itself spending £8m on fuel every day, which works out at £3bn a year. Some 80 per cent of its fuel use is now hedged at $94 – as of Friday evening, oil sits at around $128 a barrel.

Route expansion plans have been shelved and the number of short-haul flights available to Joe Public will be slashed.

But chief executive Willie Walsh is not alone. Earlier in the week, Ryanair's Michael O'Leary cut a miserable figure when he unveiled a first-quarter profit decline of 85 per cent.

O'Leary's cavalier traits have served him well in the past, but the bold decision to remain largely unhedged that first quarter now looks foolhardy.

Ryanair has since hedged 90 per cent of its fuel needs for September at $129 a barrel, and 80 per cent for the third quarter at $124. Back in May O'Leary promised not to hedge until oil prices fell below $100. Events have clearly overtaken him.

Following the lead of easyJet, Ryanair has said it will temporarily postpone flights to seven destinations in Europe, including the likes of Valencia and Palma.

In an effort to maintain passenger numbers, the company has warned it will have to cut the price of an average ticket by 5 per cent, instead of the 5 per cent hike it had anticipated. How long it can do this is a moot point. City analysts believe it's a matter of time before O'Leary will have to swallow his pride and raise prices dramatically.

Across the Atlantic, the picture is equally bleak. UAL, US Airways Group and JetBlue Airways have all recently posted numbers that show how badly the sector is hurting. So far 26,000 airline employees have lost their jobs in the US, with eight of the largest carriers posting a collective second-quarter loss of $5.8bn (around £3bn).

Across the world, 24 carriers have ceased flying or filed for bankruptcy this year alone.

It's easy to see why Jet Aviation, the Permira-owned Swiss aircraft management and charter services firm, has failed to attract much attention even though it has been hawked on the market since the start of 2008.

But with the fragile economics of airlines looking more perilous than ever, we can expect a wave of consolidation when bankers return to work in September. The race will be on for many firms to find a bride in a dash for the altar.

In the US, Delta and Northwest have stolen a march on rivals and will tie the knot before the end of the year. Swiss Air was gobbled up by Lufthansa last year, while the German carrier is also likely to exercise an option to buy Britain's BMI. Sir Richard Branson has offered his hand to BMI should Lufthansa decide not to exercise the option.

Last Tuesday, a smiling Willie Walsh shook hands with Iberia chief Fernando Conte over a merger, reigniting talks that had initially foundered last year.

Watch out for bargain-hunting private equity firms crashing the industry love-in too.

It seems everyone is talking. Well, nearly everyone. O'Leary says Ryanair doesn't need to merge. The shakedown, he insists, will see five main companies remaining, with Ryanair one of them of course. But despite his protestations, a continuation of the kind of cheap flights we've grown used to is unlikely.

July 2008 will go down as the month when the airline industry changed. So I hope you've enjoyed your cheap summer flight – it could be the last one you take for a while.

This deal is off. But the French still have power over our nuclear future

John Hutton, the Business Secretary, could not have made his anger any clearer. At 10.58am on Friday his department's press office issued an unprompted statement on British Energy's last-minute, late-night Thursday decision to decline the takeover advances of EDF, the French power giant.

Mr Hutton said the Government, which owns 35 per cent of British Energy, felt that, at around £12bn, "it was a good deal", and he was "ready to accept". This was a very public rebuke for the company's board, which had bowed to pressure from its leading shareholders to hold out for more money.

So now that what looked like a done deal has fallen apart, is the Government's nuclear new-build programme in tatters? EDF is the world's biggest nuclear operator and buying British Energy would have given it access to eight plant sites. Mr Hutton said the takeover "would have been a sensible way to take forward new nuclear plans", although he went on to insist that the programme "does not depend on one single deal".

Unfortunately, the statement sounds panicked rather than convincing, but Mr Hutton does have a point. EDF had already agreed with ministers that it would sell-off some of the sites. If it had held all of these premium locations, there would have been cries from rival nuclear operators that this was anti-competitive.

And EDF will still have a big role in the nuclear roll-out, even if it cannot revive a deal, as its bankers hope. The group is one of only three, along with British Energy and the Nuclear Decommissioning Authority, to own sites suitable for the new plants.

EDF should be able to build three reactors without taking over British Energy. At Hinkley Point in Somerset, it simply needs to purchase adjoining land to have room for two reactors; it can accommodate another one at Wylfa in North Wales.

The nuclear programme is not obviously under threat. But that doesn't make this corporate U-turn any less frustrating for Mr Hutton.

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