Fuel costs may ground more airlines

It's certain that the summer of 2008 won't be pretty for the airline industry: higher fares and fees for customers, more red ink for the airlines.

But what about next year, assuming that jet fuel prices remain at their historic highs?
Experts are predicting higher fares, a lot fewer travelers, a lot less capacity, fewer flights to fewer places and maybe a lot fewer airlines.

U.S. airlines are already outlining plans to make huge cuts in capacity. In recent days, United Airlines Inc., American Airlines Inc. and Continental Airlines Inc. have announced airplane groundings and schedule reductions for the latter part of 2008 and into 2009.

Many airlines have revealed plans to defer or cancel airplane deliveries in 2008 and 2009. Even rapid growers such as AirTran Airways, Southwest Airlines Co. and JetBlue Airways Corp. have slammed on the brakes.

But retrenching won't be enough to avoid big financial losses, industry observers say.

Finance professor Harlan Platt at Northeastern University in Boston said he expects oil prices to drop as the U.S. economy slows down and the impact ripples to other countries such as India and China. But oil prices must drop considerably from today's levels to save the airlines.

"If you don't have an oil price of about $75 or $80 a barrel, at the end of 2009, you'll have most of the airline industry on the financial ropes," Dr. Platt said. "They will have run out of cash or virtually run out of cash."

He noted one industry analyst's prediction that oil will hit $150 a barrel soon.

"If that happens and if that price holds, the industry will continue to hemorrhage through the end of 2009, and they'll have run out of options," he said. "They'll need to file for bankruptcy protection. And by 'they,' I mean most of the airline industry."