Soaring oil prices to draw blood from airlines: CAPA report

Dhruv Tanwar
22 May 2008

Mumbai: Oil having surpassed $135 per barrel seems to have snapped something in America. For one, the recent fierce upward spiral of oil prices has compressed months of change into a few short days.

Tipping Point?
But on 21 May, 2008 in the US, there appeared to be a tipping point. It was as if investors and consumers had been holding their breath for as long as they could – then let them out with a collective rush, as they realised oil prices were not in fact going to fall back soon, says the Centre for Asia Pacific Aviation (CAPA).

That collective rush saw American Airlines' shares fall 24 per cent to $6.22; United Airlines' shares fell 30 per cent to $8.15 and Continental Airlines lost 13 per cent to $14.20. Only Southwest Airlines, with its fuel hedge buffer escaped the savagery, falling a mere 4.4 per cent to $12.43.

In the mean while, the Dow Jones Industrial Index fell 1.8 per cent, after a drop of 1.5 per cent the previous day, and the Transportation Index lost 2.1 per cent yesterday.

American Airlines cuts back
American Airlines also announced schedule reductions and a capacity cutback of 12 per cent by the fourth quarter, as it fought to reduce costs at $130-plus oil prices. It will only be a matter of days before other similar announcements are made, as US airlines ground some of their geriatric fleets.

In addition, American Airlines also announced that it will start charging $15 for the first checked bag, a service that so far came bundled with the basic fare. That is in addition to the airline's decision two weeks ago to charge $25 for a second bag. It plans to also lay off workers in the wake of the insanely – high oil prices. It also plans to raise other fees for services such as reservation help, or oversized bags, that would range between $5 and $50.