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"Generally, local carriers are in a vulnerable position," said industry commentator Linden Birns.
Casualties thus far include local low-cost carrier Nationwide, which was placed under provisional liquidation in April this year after being plagued by cash-flow constraints, a 30% increase in fuel costs between March and April and a decrease in passenger load factors.
National airline South African Airways (SAA) CEO Khaya Ngqula said in July that the "relentless rise" in the oil price has "wreaked havoc" on carriers across the globe. "Further casualties are expected in the airline industry if the oil price remains high," he said.
International Air Transport Association (Iata) director-general and CEO Giovanni Bisignani said on Wednesday that the industry was in an "extraordinary situation".
"We are in a perfect storm with rising costs and falling demand."
Iata has forecast a US$5.2bn loss for the global airline industry in 2008, based on an average crude oil price of $113/barrel for the year. "The price of fuel is bringing a lot of changes to the environment," said Bisignani in a conference call.
He said that while there had been some relief in the oil price in recent months, the $113/barrel year-to-date average price was $40 more than the US$73/barrel average for 2007, pushing the industry fuel bill up by $50bn to an expected $186bn this year.
Bisignani said consolidation is the best way forward for the industry "by far": "With over 1 000 airlines worldwide, there are too many players."
At the same time in SA, local carriers, like all other businesses, are feeling broader inflationary pressures on their cost base.
Birns said: "Trade unions have begun limbering up for wage increase talks, with Solidarity notable for recently employing alarmist scare tactics in order to gain broader public sympathy for better remuneration packages for its SAA members."
"But unless another operator goes to the wall, it is unlikely we will see any more major job cuts in the SA industry," he said, adding that this was in stark contrast to the US where about 25 000 airline workers - the bulk of them with major carriers like American Airlines and United - are set to lose their jobs over the next few days.
According to Ngqula, global airlines are also seeking to cut costs by grounding aircraft, scrapping unprofitable routes and merging.
Birns said the rand dollar exchange rate, coupled with the cost of jet fuel that is currently averaging $142/barrel for the year and the general economic downturn, is also proving painful for operators like Comair and 1time which were previously noted for their resilience.
Already, the high oil price has taken a toll on both carriers.
In March 2008, AltX-listed 1time Holdings said the steep increase in the price of oil during the first quarter of 2008 "is of serious concern and will have a major negative impact on first-half earnings for the airline".
This statement was supported in August when the airline reported a R6.3m headline loss for the six months to end June compared with the R14.9m profit it reported for the same period in 2007.
1time CEO Glenn Orsmond said that the net loss is largely attributed to the 91% increase in average rand jet fuel prices compared to the same period last year, which resulted in an increase in fuel costs by R140m for the interim period.
Birns said that for low-cost carriers in SA, like their counterparts around the world, fuel has become the biggest single cost item, accounting for around 50% of their costs. "And it's difficult for them to bring this down as they operate previous-generation aircraft, which are not as fuel-efficient as newer planes."
"For now, the problem for airlines is getting their hands on any newer planes as they are in very high demand. Airbus and Boeing currently have unprecedented order backlogs for their A320 and 737 aeroplanes, and it is not unusual for carriers to place orders today for aircraft that can only be delivered in 2012/13.?
Losing altitude
"Most of the low-cost operators have business models designed for a $30-$40/barrel fuel price," said Birns, who added that adapting to the new cost regime has proven distressing and right now carriers are scrambling to ensure they have sufficient liquidity to cover their fuel bills while desperately trying to shore up market share in a slowing travel market.
JSE-listed airlines group Comair has already noted in a trading update that its earnings are expected to be between 30% to 40% lower for the year to end-June as a result of the tough conditions. It is expecting to release its results on 17 September 2008.
Birns said that in the medium to long term, the outlook for the local industry is still good.
"Unlike Europe and North America, there are very strong fundamentals underpinning the airline and airfreight business in southern Africa. More specifically, these are the inadequate road and rail infrastructure and the lack of navigable rivers," he said.
Set against these is an increasing need to move people and goods between markets in a safe and speedy way.
Prospects 'still good for SA'
"The pain being experienced by airlines now relates to deferred growth. We saw a similar pattern after 9/11. But if they can weather the storm with strict financial management, the longer-term prospects for SA airlines are still very good," said Birns.
Birns' take on the industry is very different to that of revered value investing guru Warren Buffett, who said the worst sort of business "is one that grows rapidly, requires significant capital to engender the growth, and then earns little or no money. Think airlines.
"Here, a durable competitive advantage has proven elusive ever since the days of the Wright Brothers. Indeed, if a far-sighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down."
- Fin24.com
