Oil prices may force many smaller airlines of Europe to close down

A number of smaller carriers in Europe are likely to go out of business in the coming months if the oil price does not fall considerably. Currently, oil costs about $130 a barrel.

According to the International Air Transport Association (IATA), the international industry trade group of airlines headquartered in Montreal, Quebec, Canada, airlines will have to hedge against the oil price and cut unprofitable flights and routes to help them stay afloat in the face of prohibitive oil prices.

In addition, a slump in demand from consumers will adversely affect the profits margins of airlines. Rising prices of commodities, including that of petrol and foodstuffs, are feared to deter the common man from taking “short-haul weekend breaks or second holidays,” according to the International Air Transport Association.

A report from IATA says that, in all, 24 airlines have closed shop around the world so far in 2008. Out of these, nearly half were based in Europe.

Silverjet, MAXjet Airways and Eos Airlines were among the small carriers that went bankrupt in 2008.

Silverjet, the British all-business class airline based at London Luton Airport, suspended operations on May 30, 2008. It had operated services to Newark Liberty International Airport, New Jersey, the United States, and to Dubai International Airport.

The transatlantic all-business class airline MAXjet Airways, headquartered in the Dulles section of Loudoun County, Virginia, the United States, had operated services to London’s Stansted Airport from Las Vegas McCarran International Airport, Los Angeles International Airport, and New York’s John F Kennedy International Airport.

Eos Airlines, founded in 2004, was an all-business class airline based at John F Kennedy International Airport, New York, the United States. It ceased passenger operations on April 27, 2008, but continues to operate charter flights.

Andy Clarke, director of air transport policy at the European Regions Airline Association (ERA), was quoted as saying: “Airlines are facing their hardest time since 2001, and it would be normal to expect some bankruptcies across the industry.”

The news agency Reuters quoted an analyst as commenting on the situation: “Certain low-budget airlines won’t be able to compete effectively as margins tighten and fuel costs spiral upwards. The majors – British Airways, Air France and Lufthansa – and major low-budget airlines Ryanair and easyJet will survive although they may have to drop some unprofitable routes.”

Said another analyst: “In the short term, the only differentiating factor is whether an airline has fuel hedging or not. Those who survive must substantially cut back on capacity – they can cut out the loss-making services and focus on what makes money.”

Michael O’Leary, chief executive of Ryanair, the Irish airline with headquarters in Dublin, recently detailed the gravity of the problem at the presentation of the airline’s annual results. If the price of oil stayed at $130 a barrel, O’Leary cautioned, the group’s profits of nearly 500 million euros ($780.4 million) would be wiped out by March 2009.

Ryanair, which has its biggest operational base at London’s Stansted Airport, is Europe’s largest low-cost carrier.

According to Michael O’Leary, British Airways, the national airline and flag carrier of the United Kingdom and one of the largest airlines in Europe, has 70% of its fuel hedged at $82 a barrel for the first quarter of 2008. The figure is expected to fall to 55% at $90 in the fourth quarter of 2008.

However, if oil prices stay high, the British Airways will suffer badly as the terms of its hedging deteriorate, O’Leary added.

In his opinion, SkyEurope Airlines of Slovakia is a possible casualty by the end of the summer of 2008. (SkyEurope Airlines is a low-cost airline with its main base at M R Stefanik Airport in Bratislava, Slovakia, and other bases in Prague, Vienna and Kosice. With bases in Austria, Czech Republic and Slovakia, it was the first multi-based airline in Central Europe).

Michael O’Leary predicts that small British airlines such as Jet2, FlyGlobespan and Flybe are also facing harder times.