The Quickie

A bite-sized look at this week's news…

Flying Fuel Prices

Posted by 19sevenseven on October 20, 2008

We can’t escape it. The words ‘credit-crunch’, which have just entered the English dictionary, are being projected out of every television show and newspaper to do with consumer affairs. Flying and holidays are seen as a modern day luxury, and in the time of crunch, luxuries go. The airline industry has had its fair share of credit crunch related issues too. Some have gone out of business, many have cut capacity and allegedly one airline has even removed sugar sachets from meal-trays in a bid to stem costs.

Blame the US

The credit crunch first hit the US in late 2007, when over greedy mortgage lenders’ customers started to feel the pinch. Excessive loans were given to people who wouldn’t normally be offered them. These factors alongside the rising cost of living, through higher fuel and grocery bills, meant some struggled to pay the mortgages at all, which meant foreclosures.

Winds of Change

Soon after, the economic rumblings started to blow across the Atlantic. In the UK, first-time buyers were given easy access to cash by lenders to get on the property ladder.  In February 2008, the UK government saved troubled mortgage lender Northern Rock by privatising it. Northern Rock had fed its incredible growth by relying on world markets to borrow most of the cash it loaned for mortgages.

Stretched and Squeezed

It isn’t just the financial institutions that are being stretched; other industries are starting to feel it too. The airline world, which is well known for its cyclical highs and lows, is looking for its closest emergency exit, by cutting routes, slashing capacity, and laying off staff the world’s airlines are attempting to stave of the financial pinch.  Some airlines have already crashed landed economically, such as XL, Maxjet, Eos, Oasis Hong Kong, and Silverjet.

Even the Big Ones are Shrinking

In the US, Continental Airlines has cut 3,000 jobs, 6.5 percent of its total work force and reduced its flying capacity by 11 percent. 67 planes in Continental’s fleet are off to the desert for retirement. 100 of United’s fleet are facing the same fate with an 18% cut in domestic services, and a 5 % cut in their international services.  4,000 employees of Delta has offered voluntary redundancy, while over at Northwest, 2,500 frontline and management staff will be cut.

Huge Losses Predicted

British Airways is forecasting a major drop in in its profits. The airline recently announced a cut in capacity by 6.4% with the suspension of flights to Calcutta and Dhaka, a recruitment freeze, and a £100 million cut in capital expenditure.  In Europe, both Air France-KLM, and Iberia have reported a drop in profits. Air-France-KLM have said that their first quarter profits have fallen by 59%, Lufthansa, and Austrian Airlines have also issued profit warnings.

Slow it Down

Several US arilines have their pilots to fly more slowly to save on cash. BMI has said its reduced its flying speeds by 3 mph, and Air New Zealand, Air Canada, Brussels Airlines have announced similar moves.

Higher and Higher

The last year has been marred with outlandishly high fuel prices. The reactions by airlines around the world have shown that these high prices can not be sustained with out cutting back in capacity, on staff, or by increasing ticket prices.  A number of factors have forced up the price of oil. The equation works like this. The amount of oil being produced does not match supply; oil refineries are limited in numbers; countries such as India and China have seen a surge in demand as they modernise; oil is traded speculatively for financial gain, which pushes prices up artificially; these factors combined with the fact that environmentally friendly oil refining is expensive, and costs time and money, its understandable how the cost of fuel has skyrocketed. 

How and when this financial crisis will end is yet to be seen.  All people, businesses, and airlines can do is cut back as they see fit, save capital, and know what to do in an unplanned financial emergency.

For further information on this topic, please click here. (Background article)

By Quinn Gormley

quinngormley@yahoo.co.uk

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