Airlines and the

credit crunch

School: De Haagse Hogeschool

Name: Mariya Tantilova
Student Number: 07048637
Subject: IER
Class: 2 IBMS F
Professor: Dr Peter van Hengel

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Executive summary

There is no doubt that the financial crisis is affecting every single aspect of the
economy. So as a result of the frequently changing dollar rates and the price of the oil,
the airline industry is also experiencing trouble keeping the revenue rates at normal
level. The demand for air services is also dropping rapidly and as a result thousands
of workers in air service companies are loosing their job. However, despite the crisis
the biggest airplane makers are busy with orders for new planes. As the companies
are trying to be more efficient because of the oil, they are trying to find the most
rational way of lowering the impact the crisis will have on them. One way they can do
that is by replacing the old oil-inefficient planes with lower number, but more efficient
new models. Another way of dealing with the crisis is changing, or remodeling the
companies’ business plan so that they can meet the new demands of the industry
after the crisis.
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Table of content
Executive summary.....................................................................................................................3
Introduction.................................................................................................................................5
Literature overview.....................................................................................................................6
Analysis.......................................................................................................................................6
Methodology\Recommendations................................................................................................8
Conclusion .................................................................................................................................9
References.................................................................................................................................10
Appendix: .................................................................................................................................11

Introduction
This paper is based mainly on an article from www.economist.com. The article is about the
effect that the financial crisis and the oil crisis have on the airline industry. Everybody is
affected by the crisis; every industry is suffering and continuously loosing revenues. We, as
customers, are also affected by the problems that the airline industry is facing right now. I
think that the problem must be analyzed in a deeper lever then before, because every small
problem can be the cause of this chain reaction that we are witnessing in the past months. I
chose this issue because recently it is becoming very important for us, as future economists
to be able to trace the consequences of crisis like that, and also to try to find ways to deal
with it. The analysis will include information primary obtained from the article itself and
Internet web pages of some financial and economical press resources.

Literature overview
The article’s name is “Airlines and the credit crunch: Shredding money”. It is original article
from the official web page of The Economist magazine. The article was released in
September 18th 2008.

Analysis
The airline industry is in crises, as a result of the record-high oil prices and economic
indisposition, which is continuing for more then a year now. It is estimated that the airlines
will loose about $6 billion by the end of this year. However, some airlines are taking some
action to lower the risk of bankruptcy, like cutting services and dismissing a big number of
workers.

Despite of the crisis, the biggest airplane makers Boeing and European rival Airbus are
having a record orders in stock – 7,300 commercial jets. A lot of carriers have ordered
enough plains to more then double their fleets in less then 6 years.

Chris Tarry, British aviation consultant says that “There are about 2000 too many aircrafts in
the backlog at this moment and a number of orders are clearly going to be modified or
deferred”. But as a surprise comes the fact that most of the cancellations doesn’t come from
US air companies, but from Middle Eastern airlines and Asia-Pacific carriers, that altogether
ordered about 1006 new airplanes. European companies are also having some troubles,
after the fall of Alitalia, caused by the global financial crunch.

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As a whole this crisis is reshaping the industry and the way companies operate in general.
Air cargo volumes had fell 1.9% year-in-year only in July and the largest air cargo carrier,
Asia- pacific carriers, reported 6.5% drop in the demand. Weaker economic growth outside
US is being reflected in a change for worst outlook for both air travel and air carrier services.
Also because of the big orders that the companies make for new airplanes, they are making
a loss. Due to the overcapacity of planes some airlines has, they are leaving their planes to
fly with empty seats and that way the capacity growth exceeds the traffic volumes growth.
And as a result there is disequilibrium for both supply and demand of airline services.

Another serious concern is still the rapidly changing oil price. “The situation remains bleak.
The toxic combination of high oil process and falling demand continues to poison the
industry’s profitability” says Mr. Bisignani, director of IATA, the global airline trade
association. Although the slightly fall in oil price from the record level of $147 a barrel
reached this July has made it a bit easier for the airlines, the rise in the industry’s cost for fuel
as a whole is still 35%, which is very high compared to 13% for 2002.

More than 25 airlines had collapsed since the start of the year. The situation is already very
serious for most of the airline companies, but Mr. Bisignani says that the situation was
expected to escalade further with the coming of the winter months as traffic volumes decline
and airlines struggle to maintain cash flow to pay their expenses. In the six years between
2001- 2006 the global airline industry has suffered net losses of $42 billion and only returned
to a $5.6 billion profit in 2007. But the nightmare is probably not over yet. IATA forecasts that
the industry would go back to a loss of about $5.2 billion this year, considering that the
average oil price stays $113 per barrel, and with even further net loss of $4.9 billion for the
next year. Experts are expecting that the fuel will be even 40% of the total airline industry
costs in the next working year- 2009, as hedging is providing less protection.

Profits in the European companies are estimated to fall from $2.1 billion to $300 million the
upcoming year, which is highly unacceptable for the company’s cash flow and their
shareholders.

But these are not the only problems that the air industry has. One very big problem is still the
employee force that has to be cut because of the crisis. It has been estimated that more then
25 000 staff has to be laid off because the companies are not in the position of handling their
salaries anymore. The more airplanes grounded the more employees will be fired. With the
grounding of more then 450 plains, companies like Continental, United Airlines, American
Airlines, Air Canada and many more, must try to change their model in a way that they can fit
again in the current fuel and unprofitable environment.

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The airlines are definitely “suffering” right now. According to IATA, the air company’s trade
organization, if fuel costs stay at present level, the world’s airlines is going to have a huge
lose, estimated at about $6 billion this year. In Europe the crisis is coming slowly, but in
America the companies are facing the problem faster. The main reason is the dollar level,
and from then the oil prices that are making it hard for the air companies to handle their fuel
necessity.

So does the airline crisis going to be the sequel of the Financial break down crisis? With the
falling of so many airlines and carriers, the industry is definitely making great step back. The
negative impact of the industry crisis is universal. Official data from IATA shows that the
difficult business environment is going to continue during 2009. Most economics are
expected to deliver even weaker, or negative, growth next year, which will reflect not only on
the air travel and freight, but also on many other sectors of the economy.

Methodology\Recommendations

All in all, the airline crisis is facing the worst crisis since the attacks of 9\11. That serious
crisis needs serious resolutions also. In my opinion some of the more urgent problems that
the industry must work on are:
• The current business plan.
Companies must adapt their current business plan in a way that they can better fit in the
highly risk business environment occurring.
• Reducing the costs
Airlines must try to reduce their cost as low as they can, so that they can rise their revenues
as high as possible.
• Labor agreements
It is essential for the airlines to reach new labor agreements also.
• The government help
Airline industry must be fixes and strengthen. The governments of the countries can play a
very essential role in the rescuing of the industry. With some tax relives and air corridors
expansion, the governments can definitely make a positive impact on the industry rescuing.

IATA has also offered a 6 key points rescue plan that generally propose that the government
must make the most important decision about the rescue of the industry and to try to make
some small relieves and bailouts so that the airline companies can stand up again.

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Conclusion

In conclusion I would like to say that, it is obvious that the airline industry is paying a high
price for that crisis and it is even more obvious that radical changes must be made so that
the drop in the revenues and demand can stop. The international freight traffic is falling
constantly in the past months fallowing the changing dollar value and the price of the fuel.
Radical changes must be made to help one of the biggest industries in the economy to rise
up again.

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References
1. “Airlines and the credit crunch: shredding money” ,September 18t 2008, article The
Economist print edition from www.economist.com
2. “Airline crisis”, from www.businessweek.com
3. “Airlines going into crisis”, September 14th 2008, article from John Hooper and Lisa
Bachelor, The Observer
4. “Airline losses set to exceed $5Bn”, September 3rd 2008, article by Kevin Done, The
Financial times, www.ft.com
5. “Still a bumpy ride”, August 15th 2008, article from The Economist print edition,
www.economist.com

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Appendix:

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