‘Airlines will have to undergo major restructuring to emerge profitable on the other side of this disastrous period'

As the ash cloud from the volcanic eruption in Iceland clears, travellers considering a European summer vacation are starting to wonder whether the staggering losses airlines suffered during the week of travel disruptions will drive up airfares.

The answer, airline industry analysts say, is probably not.

The 100,000 flight cancellations worldwide due to the ash cloud, which posed a threat to jet engines, became the latest setback for an already beleaguered airline industry. Between high jet fuel costs, earthquakes and hurricanes affecting travel to the Caribbean and South America, and the recession, airlines are hurting like never before. Last year, the industry lost $9.4 billion, according to the International Air Transport Association, and the airlines estimate they lost $1.7 billion because of the ash-cloud-related disruptions.

“Sometimes the airline gods smile on you and sometimes they don't,'' said Darryl Jenkins of the Airline Zone, an airline economics group. “The last couple of years, Thor has been angry.''

Raising fares, no answer

But raising fares is not the answer, analysts say.

For one, prices to Europe are already sky-high, with most summertime round-trip fares from Boston into London, Paris, Rome, Frankfurt, Amsterdam, Madrid, and Dublin well over $1,000 — a few hundred dollars more than they were last summer.

“I think it's going to be hard to convince people who are used to paying under $1,000 to pay even more,'' said Anne Banas of SmarterTravel.com, a travel deals site based in Charlestown. Adding to that, reports about the possibility of recurring eruptions from the Icelandic volcano are making some people jittery about booking flights. If people are already on the fence about flying, higher fares would discourage them further, airline analysts say.

If planes don't fill up, there could even be some last-minute deals in July and August.

“I think Mother Nature will have the last word,'' said Rick Seaney of Farecompare.com.

“If this thing continues to shoot ash in the air and gum up the works, I think people will say, ‘Hey, I don't need the stress,''' he said.

Meanwhile, there's not much airlines can do to alleviate the financial strain they've experienced because of the volcano, said George Hoffer, a professor of economics at Virginia Commonwealth University and a long time aviation industry observer.

Price changes typically are linked to either an increase in expenses for things such as jet fuel or an increase in demand, he said. Because the ash cloud disruption was a fixed cost, or an expense that does not change in proportion to business activity, it does not make sense to raise fares.

“When your fixed costs change, economic theory says don't change your pricing, you just have to eat it,'' Mr. Hoffer said.

Airlines do not typically comment on airfares. But American Airlines said the ash cloud disruptions cost the carrier $15 million after a challenging first quarter. Chief executive Gerard Arpey told investors last week that “lingering weakness in the economy, rising fuel prices, and cost pressure mainly resulting from capacity cuts combined to produce a disappointing result.''

Financial impact

A bailout could help mitigate the financial impact on airlines.

Airlines and the International Air Transport Association have called for government compensation for lost revenue — estimated to be as high as $400 million a day at the height of the ash cloud crisis. Lawmakers have stepped in before. When U.S. airspace was closed for three days after the September 11 terrorist attacks, the U.S. government gave the airlines $5 billion.

Cutting the number of available seats, and thereby increasing demand, is one way airlines can save money and boost fares. But capacity has already been slashed about 15 per cent in the past few years, and it would have to be cut by the same amount to make a price difference, said Jenkins of the Airline Zone.

“The only way they could really increase fares is if they cut a double-digit amount of capacity,'' he said.

Restructuring, a must

Airlines will have to undergo major restructuring to emerge profitable on the other side of this disastrous period, Mr. Jenkins said.

Some will go into bankruptcy, some will merge with other airlines. But he does not see it putting any American carriers out of business.

“This huge disruption for travel is harsh,'' he said, “but it's not going to be a game-ender for anyone on this side of the pond.''

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