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US airlines take stock after a turbulent financial year
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| 15 December 2005 |
With no clear signs of softening air travel demand on the horizon, the outlook for industry revenue is strong for the next several quarters, and average fares are likely to trend higher again next year. However, the future direction of crude oil and jet fuel prices remains the greatest unknown that will likely determine whether 2006 is a year of modest balance-sheet repair or simply another year of weak cashflow generation and ongoing liquidity pressure, Fitch said in a recent report.
The recent spike in refined product prices caused by Hurricanes Katrina and Rita exposed US airlines to extreme fuel cost pressure at a time when significant gains in revenue per available seat mile (RASM) would otherwise have supported stronger operating margins and respectable cashflow generation.
Unfortunately, the surge in 2005 energy costs - largely unhedged at the major carriers - has kept pressure on cash balances and prevented US airlines from beginning the process of delivering badly damaged balance sheets. Indeed, the post-Katrina jet fuel price spike helped accelerate the timing of Chapter 11 filings by Delta Air Lines and Northwest Airlines on 14 September and Independence Air on 7 November. While no other large carriers face the risk of an imminent liquidity crisis moving into 2006, it is clear that a similar energy supply shock could lead to another year of unsustainable operating results - even if such a shock did not result in weaker economic growth or diminished air travel demand.
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