Airlines will face an increasingly serious crisis in the coming months, industry executives have warned, as persistently high fuel prices force them to cut flights and costs and postpone payments on leased aircraft.
Executives are sounding the alarm as the industry prepares for its first winter season since the war in Iran triggered an energy shock that has already knocked profits.
EasyJet, one of Europe's largest airlines, and Germany's Lufthansa are among the companies that are reducing capacity to get through the winter, a period marked by weaker demand and which, in previous years, has driven airlines into bankruptcy.
In a sign of growing pressures, Delta Air Lines on Friday sharply cut its annual profit forecast, saying that rising fuel prices caused by the conflict in the Middle East would cost it an additional $6 billion this year.
“This is a crisis in all its dimensions,” said Michael O’Leary, chairman of Ryanair. "Everyone is going to suffer next year... we're just trying to streamline the operation as much as possible."
Industry leaders, analysts and financiers told the FT that the risk of airlines going bankrupt during the winter season — which starts this month and runs until the end of March — was greater than in previous years.
Possible bankruptcies would add to the collapse of American airline Spirit Airlines in May and the end of airBaltic last month.
"This winter we will see small and medium-sized businesses struggling and having trouble surviving," said Luis Gallego, chief executive of IAG, which owns British Airways. "Some will be very close to disappearing or will disappear."
O’Leary, from Ryanair, said he expects the spike in fuel prices caused by the conflict in the Middle East to last until at least 2028.
Analysts and executives said the financial impact of higher oil prices on European and international airlines is increasing as fuel hedging contracts expire, leaving them faced with the choice between taking on new protections, locking in higher costs or risking paying even more in the spot market.
"Even for those who buy fuel six months in advance, today the price is still at US$1,200, US$1,300, an incredibly high level," said Kenton Jarvis, president of easyJet, compared to the industry's usual level of around US$700 per ton.
The difference between the price of crude oil and jet fuel — known as the "crack spread" — has increased so much that several airline groups, including Lufthansa and IAG, have begun hedging jet fuel itself, rather than just oil.
American airlines do not hedge jet fuel, leaving them more exposed to soaring prices this year.
"Everything indicates that it will be a difficult winter, even for the airlines that rely on hedging," said John Strickland, an aviation industry analyst. "We will see considerable cancellations, and this even puts the survival of some companies in doubt."
In a bid to protect its bottom line, easyJet has doubled capacity cuts planned for this winter, removing a further 700,000 seats from its schedule, Jarvis added. In September alone, the sector eliminated 6 million seats from flights scheduled for October, November and December, according to data group Cirium. This equates to around 1% of total flight capacity.
Airlines are increasingly turning to their fleets as a way to reduce costs.
One leasing company said nearly a dozen airlines had already requested deferral of lease payments, asking to delay them for several months or reduce monthly installments by about 10%. According to this source, among them were companies exposed to the Gulf region.
An executive at one of the world's largest leasing companies said it had received "some requests to defer lease payments from smaller airlines" but added: "The vast majority of our customers say demand remains quite good, with revenues per passenger remaining at reasonably solid levels."
Airlines are also getting rid of older, less fuel-efficient aircraft faster than anticipated following increased deliveries of planes from Boeing and Airbus.
easyJet's Jarvis said the company had accelerated plans to retire its Airbus A319s, while Lufthansa said it would retire some older aircraft ahead of schedule.
Carsten Spohr, president of Lufthansa, said that the German company is adopting measures to reduce capacity in winter, such as grounding large Airbus A380s and Boeing 747s, which have difficulty filling in the low season.
Even with growing concern about winter, executives pointed to some more positive signs in the market.
They said demand remained strong in long-haul business class travel, where sharp price increases had failed to dampen demand, although some said the short-haul and leisure markets were beginning to suffer.
“The more premium the operation, the smaller the impact,” said Spohr. "I think my colleagues in the low-cost sector are more concerned."
easyJet stated that bookings for next summer are weaker than in previous years, but that more customers are now leaving to book their trips closer to the date.
IAG's Gallego said the European leisure travel market is suffering more than others, while demand from the premium segment remains "strong and resilient".
Although the group will maintain stable capacity in winter, it has reduced some Vueling flights originating in Barcelona and reallocated capacity to other markets.
"Nobody knows what's going to happen," Gallego said. "We will do whatever is necessary."
