British Airways is up to its neck in perhaps the biggest crisis the aviation industry has ever known.
That is quite a statement. But it is not mine. The words are BA chairman Martin Broughton's, from his address to shareholders at the airline's annual general meeting last week.
Broughton told the AGM the rapid rise in fuel costs had forced not just one but three revisions of the airline's business plan in the past four months. He warned it would be a "considerable achievement" to avoid reporting a loss this year.
It rather sounds as though BA shareholders, having recently received their first dividend payment in eight years, should expect to wait a while for another. At least one analyst believes the airline's payment of that dividend - equivalent to about a week's fuel costs - was "daft".
But how serious is the crisis?
Press reports focus on planned cutbacks by BA - a capacity reduction of up to 5% this winter and a partial freeze on recruitment. BA chief executive Willie Walsh was pretty explicit about the limits to this last week although details will not be announced until next month.
According to the Financial Times, "Walsh made clear BA would not be grounding any aircraft." Instead, the airline will "trim capacity by cutting the frequency on some short-haul routes". This week, head of corporate sales Richard Tams insisted: "The cuts will not have a significant impact on the business schedule. Any cuts will be where we have multiple services."
Walsh intends to keep operations broadly as they are instead of expanding by 2.5% or so in the current financial year as originally planned. "Given that expansion will not take place, we don't need to recruit people for the winter," he said. That is unfortunate for those hoping to get a job and will mean BA workers have to cover for departing colleagues, but it does not sound like the actions of a man reacting to the greatest crisis in aviation's history.
BA has been conducting a review of its operations under the codename Project Columbus. The title could be considered unfortunate. Columbus may be commemorated for stumbling upon the Americas, but his transatlantic ventures led to a good deal of destruction - well, genocide, actually. Let us hope that is not an omen.
Officials of the union Unite are concerned about impending job cuts. Walsh has played down their fears, saying there are no plans to cut jobs - although that could change.
He did warn again last week that fares will rise, but Walsh has consistently said that. In fact, BA raised most of its long-haul fares by 5% last month on top of a succession of increases in fuel surcharges. Walsh obviously means they have some way to rise yet.
The BA boss also repeated that fare rises "will have an impact on demand". He just thinks BA will be less affected than other carriers because half its passengers are business travellers who are generally less sensitive to price rises, particularly on long-haul routes.
If BA fails to match the "considerable achievement" Broughton spoke of, it will mean the high oil price wipes out a record profit of £883 million for the year to March.
But Broughton is right despite the strong position of BA - this probably is the biggest crisis the airline industry has faced.
Consider its rivals. We can rule out the crisis of 1929 and the hungry thirties when commercial flight was in its infancy. The Second World War wasn't a great time for commercial carriers, but the comparison does not help us.
Flying was big business by the time oil quadrupled in price in 1973-74, but the era of mass-market leisure travel was just beginning. When oil doubled in price in 1979-80 and the UK then suffered its worst post-war recession, some of the world's biggest economies - Germany, Japan - were barely affected. By the time recession hit again in the early 1990s the oil price had lowered. Airlines largely flew on through.
The attacks of September 11 2001 triggered a fall in demand in the US and a crisis for the country's airlines. But with the exception of Swissair and Sabena, Europe's major airlines carried on.
The situation is worse this time. In essence, there are two economic crises - a recession with its roots in the US and an inflationary crisis driven by rapid growth primarily in China. Hence we see economic downturn and rising inflation - or good, old stagflation to use the 1970s term. God forbid bell bottoms return, too.
For airlines, the oil price is a killer. BA has said it cannot make money with oil at $125 a barrel. Ryanair has said similar. Neither expect oil to remain at its current price, but no one knows what the future price will be.
At the same time, most airlines have cut close to the bone already - mainly in reaction to the low-cost carriers. There is not a lot of slack to take in.
Of course, BA is not buying most of its oil at $125 a barrel. It is paying nearer $84 for most of its fuel. So it should still be making money. The key will be what happens as the hedging deals - the advance agreements to buy oil at a cheaper price - run out.
No doubt there will still be bargains for some consumers, but average fares will have to rise in line with the fuel price. If fuel now comprises one third to half of airline operating costs and the oil price has doubled in a year, fares will broadly have to rise by between one-sixth and one-quarter. OK, I have vastly over-simplified the maths - but the general point stands.
Rather than hike prices to that extent in one hit, carriers will ground aircraft, conserve cash and hope rivals go bust.
Be ready for a bleak October when winter schedules kick in.
Comments (25)
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