Airline Losses Predicted to be HUGE

IATA's gloomy forecast spells continuation of surcharges and higher fares

The International Air Transport Association (IATA) is projecting that the global airline industry will lose $2.3 billion (that's billion with a B) worldwide in 2008 -- assuming an average oil price of $106.50 per barrel. That's a big assumption. If oil prices remain at a lofty $135 a barrel, those losses could be as much as $6 billion worldwide. Just this past March, when oil was at about $85 a barrel, IATA foreaw an industry-wide profit of $4.5 billion based on an average crude oil price of $86 per barrel.

At current oil price levels, IATA predicts that airlines' cumulative fuel bill will be around $176 billion, more than one-third of operating costs. Compare that to 2006 ($136 billion for fuel, representing 29 percent of total operating costs) and 2002 ($40 billion for fuel, 13 percent of operating costs).

No wonder airlines are charging for checked bags and doing away with the peanuts and pretzels -- and of course mothballing planes, cutting underperforming routes (in the US, anyway) or going out of business altogether.

Airline execs (those still employed anyway), gathered at IATA's 64th annual meeting in Istanbul, resolved to ask governments to step in and take actions that would help stabilize the airline industry with six specific calls to action:

1) Governments must eliminate archaic rules that prevent airlines from
restructuring across borders.
2) In view of existing fees and charges, governments must refrain from imposing multiple and additional punitive taxes and other measures that will only deepen the crisis.
3) State service providers must invest to modernise air transport infrastructure urgently, eliminating wasteful fuel consumption and emissions.
4) Business partners, in particular monopoly service providers, must become as efficient as airlines are now. If not, regulators must restrain their appetite with tougher regulation.
5) Labour unions must refrain from making irresponsible claims and join the effort to secure jobs in aviation and indeed in other industries.
6) In the interest of the global economy and the flying public, we urge authorities to enforce the integrity of markets so that the cost of energy reflects its true value.

I'm not seeing any calls for the international community to pressure oil producing countries and oil companies to roll back or at least stabilize oil prices ("integrity of markets" is a pretty wimpy phrase for what is supposed to be a call to action), and I'm not seeing any calls for executives to make the same salary and bonus sacrifices that union workers have been required to make. I don't know how executive compensation at foreign airlines compares with that of US carriers, but it would seem to be worth putting into the cost-cutting and revenue-raising equation.

More than a year ago, Washington Post reporter Del Quinten Wilber wrote about pay cuts for employees concurrent with big bucks for bigwigs in "Turbulence Over Executive Pay" about just this subject. Just a couple of months later, "Bill Moyers Journal" on PBS covered the same subject on "Payday! CEO Salaries." Part of Moyers's report:

"Northwest is the last of four major carriers to come out of bankruptcy after the 9-11 terror attacks. But it is not the first airline to use bankruptcy to keep operating while it cut costs, convinced creditors to exchange debt for equity, and rewarded executives after wringing concessions from the rank and file.

"When US Airways emerged from bankruptcy in 2005 CEO Doug Parker was awarded almost six million dollars-worth of stock and cash. Employees got pay cuts of up to 53 percent:
Pilots' top salary is $120,000.
Mechanics earn at most $48,300.
And flight attendants' top salary is just over $34,000.

"When United Airlines came out of bankruptcy in 2006, CEO Glenn Tilton was
awarded stock options and awards that, over four years, would earn him almost
$40 million dollars. More than the airline's $25 million dollar profit that year.
Employees, on the other hand, got pay cuts of up to 50 percent:
Pilot's top pay is $158,200.
Mechanics earn at most just over $52,000.
And flight attendants at most $37,600.

"Only Delta Airlines CEO Gerald Grinstein didn't follow the Wall Street
script. When Delta climbed back from bankruptcy this past April … it's
employees took pay cuts of up to 40 percent. And Grinstein actually turned down
10 million dollars in compensation."

As I noted, neither oil prices directly nor executive compensation was part of IATA's six-point proposal for rescuing the airline industry. How low-fare airlines will survive is another issue entirely. They have been able to succeed with efficient operations, but there's no way to trim fat off an already lean product when oil is $135 a barrel.