Airline bankruptcies cast doubt across industry

A Reuters report says that the failure of four small US airlines in one week has sent a chill through the industry, especially the so-called low-cost carriers in fringe markets, as they grapple with record fuel prices and a softening economy.

Pressures have been squeezing all airlines in recent months, and they finally got the better of Aloha Airlines, Champion Air, ATA Airlines and Skybus Airlines, which all said last week they had ceased flying.

The carriers operated in niche markets where, unlike more diversified rivals, they had fewer options for offsetting fuel bills when the price of oil climbed above $US100 a barrel.

Experts say some of the smaller low-cost airlines such as Frontier Airlines and Virgin America must be acutely aware of difficult conditions as they struggle to expand their reaches in domestic markets, battling more entrenched rivals like JetBlue Airways Corp and Southwest Airlines Co.

“It’s a shocking series of things that have happened,” said Stuart Klaskin at KKC Aviation Consulting. But, so far “we’ve not yet seen a true, established low-cost carrier fall by the wayside,” he said.

Discount carriers like Southwest and JetBlue used their low-cost models and simple point-to-point route structures to poach business from their largest rivals, including AMR Corp’s American Airlines and UAL Corp’s United Airlines.

But the smaller discount carriers have started to look vulnerable.

“Carriers that are sort of the fringe market may in fact be weaker,” Klaskin said. “You have to start looking at the weaker sisters of the low-cost carriers.”

WHO’S NEXT?

The airline industry has been battered for years by a low-fare war that tipped major airlines like United, Northwest Airlines Corp and Delta Air Lines Inc into bankruptcy.

Massive restructuring both in and out of bankruptcy lent stability to the industry. Aggressive cost cutting and capacity reductions also paved the way for major airlines to raise fares to offset their fuel costs.

Fare increases, however, have not kept pace with fuel bills, and some major airlines are starting to look shaky again.

Low-cost airlines have also begun to feel the pinch of high fuel prices. Despite extensive fuel hedges that have insulated it from energy price spikes, Southwest has had to scale back growth plans to brace for worsening conditions.

The woes of airlines like ATA, which operated largely as a charter carrier, and Aloha, which served Hawaiian vacation markets, underscore the troubles faced by all airlines.

“At the margins of air transportation, it’s getting harder and harder to make money,” airline consultant Michael Boyd said, referring to the niche carriers.

Klaskin said that of the major low-cost carriers, he sees Denver, Colorado-based Frontier as the most vulnerable.

“Clearly I think Frontier has got the most challenges ahead of it from a competitive and financial perspective,” he said.

Frontier, which posted a wider first-quarter loss on the back of higher fuel costs, faces stiff competition from larger rivals, Southwest and JetBlue.

Avondale Partners analyst Bob McAdoo said in a research note on Monday that privately held Virgin America may be the next airline to fall.

Citing limited data from government files, McAdoo noted that Virgin lost $US35 million in its first quarter of operations last year. The carrier, partly owned by Richard Branson’s Virgin Group VA.UL, flew planes that were often only a little more than half full on its primary domestic routes.

“With that, we doubt subsequent financial results are meaningfully better,” he said. “Given the ownership structure of Virgin America, which may limit the British Virgin Group’s ability to infuse more cash, we see parallels between Virgin and the (other) failed airlines.”

A Report by The Mole