Airlines around the world are – figuratively at least – dropping out of the sky. Having watched the price of jet fuel soar to record levels over the last several months, airlines have only been able to sit by and watch, hoping that something, anything, would intervene to bring it back to more reasonable levels.
Yesterday, Oasis Hong Kong Airlines, a start-up that began flying just 17 months ago, became the latest carrier to simply run out of time. The company, which tried to forge a new furrow as a low-cost, long haul carrier to Asia – it offered routes for as little as £65 from Gatwick to Hong Kong – called in the administrator. In a statement, chief executive Stephen Miller said: "It is with great regret that Oasis Hong Kong Airlines has today voluntarily applied to the Hong Kong courts to appoint a liquidator."
That brings the count to at least four airlines that have gone bust in the last three weeks. The other three, Aloha Airlines, ATA Airlines and SkyBus, were all American. Aside from Alitalia, a saga that has been dragging on since well before oil hit $100 (£50) per barrel, the epidemic has yet to ensnare European carriers. Indeed, no one expects the largest airlines to follow suit and fold. But what is on the cards, say sector analysts, is a brutal weeding out of small and medium-sized carriers and those not running hyper-efficient operations that are built to withstand the added cost.
The macro signs couldn't be worse. The International Monetary Fund yesterday cut its growth forecast for the UK for this year and next, and predicted that America would slide into a mild recession. The US Energy Information Administration, meanwhile, predicted the oil price would average $101 per barrel for the rest of this year. Taken together, they make Michael O'Leary, the Ryanair chief executive who warned two months ago of a "perfect storm" of economic slowdown and high fuel prices, look prescient.
The fuel price is the most worrying. Once considered a temporary aberration that carriers would do their best to deal with until normalcy returned, $100 oil now looks like it is here to stay. This fundamentally changes the economics of an airline, and in many cases, make it simply untenable. Think of expensive oil as a lion, running alongside a herd of wildebeest and picking off the weakest of the group. It is questionable whether SkyBus, a low-cost carrier that chose Columbus Ohio as its hub, had a chance in the best of times. The spike in fuel extinguished any hope. Since Oasis started operations the price of jet fuel increased by more than three-quarters.
Yet there may be a faintly silver lining amid the darkening clouds. Willie Walsh, the chief executive of British Airways, has said that expensive jet fuel, combined with the rapidly slowing US and UK economies, could be just the impetus needed to finally stoke mergers that have been long talked about but never consecrated. In BA's case, this could lead to a deal with Iberia, the Spanish flag carrier that he made a run for last year. Then, he tabled a tentative €3.60 (£2.90)per share offer. Today, Iberia is worth one-third less, or about €1bn off its headline value. He has also made his desire known for BMI – as has Virgin Atlantic – but that depends on what Sir Michael Bishop decides to do with his majority stake in the group. What is certain is that every airline is worth a lot less today than it was a year ago as investors have fled the sector amid the growing worries.
"This industry doesn't like small players," said Richard Aboulafia, an aviation analyst at the Teal Group. "The progress towards mergers has been disappointing given that they could have done it with the luxury of a strong economy. With these oil prices, there absolutely will be mergers of desperation."
The worsening picture could also help talks between American and European law-makers, who are set to meet next month to begin negotiations on the second phase of the Open Skies treaty. European carriers are demanding the elimination of rules prohibiting foreign ownership of American carriers.Reuse content