Trouble in the air

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Darkening economic clouds, oil at $114 a barrel, cut-throat competition and disappearing credit lines are confronting airlines with their biggest crisis since the dark days after September 11th 2001. It is a measure of the panic sweeping the industry that Delta and Northwest said this week they would push ahead with their $3.6 billion merger to create the world’s biggest airline by traffic. Previously both firms had said that gaining agreement with their 11,000 unionised pilots over pay and conditions was an essential pre-condition to the deal. Yet even though Northwest’s pilots remain bitterly opposed, due mainly to unresolved seniority issues, the two airlines have decided to take the risk of a potentially long-drawn-out and fractious integration of their operations because they calculate that a merger is their best chance of survival as the industry’s woes deepen.

In the past few weeks, four smaller airlines in America—Aloha, Skybus, ATA and Frontier—have filed for bankruptcy. Maxjet, an all business-class transatlantic airline, went bust in December; its rival Silverjet is desperately looking for a buyer. Oasis Hong Kong, a pioneer of low-cost long-haul services, abruptly collapsed on April 9th. Alitalia may experience a similar fate unless a takeover by Air France-KLM, sabotaged by unions and Italy’s newly elected prime minister, Silvio Berlusconi, can be revived. Nothing links these airlines, which span every conceivable business model in aviation, other than their inability to cope with the brutal economics of the business, especially the near-doubling of fuel prices in the past 18 months.

Delta and Northwest are not yet in such a hole, but having only recently emerged from Chapter 11 bankruptcy protection themselves, they know that time is not on their side. After a strong recovery by America’s airlines in the past few years, profitability has fallen fast this year. And balance sheets are still weak, even at the big network carriers. IATA, the international organisation that represents the industry, observed last September that American carriers were “vulnerable to shocks”—and that was when oil was at $67 a barrel and the credit crunch had yet to bite. Adding to that vulnerability is the realisation by America’s airlines that there is little, if any, fat left to trim if they stay as they are. The industry has reduced its workforce by 39%, cut wages by 30% and defaulted on pensions to the tune of $20 billion.