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Airlines face a winter survival battle

European airlines face a cut-throat battle to survive the winter as recession threatens the recipe many have used to ride out a spike in oil prices — sharing the pain with consumers by slapping on fuel surcharges.
/ Source: Reuters

European airlines face a cut-throat battle to survive the winter as recession threatens the recipe many have used to ride out a spike in oil prices — sharing the pain with consumers by slapping on fuel surcharges.

Airline bosses at a conference ending on Friday heard warnings that the slump in confidence after the banking crisis left no choice but to cut costs, merge or go bust.

"Consolidation will be very strong in coming months either through players merging or disappearing. That's overdue," said Air France-KLM Chairman Jean-Cyril Spinetta.

Delegates at the World Air Transport Forum said the only question was whether a major flag carrier would fold. Small Danish low-cost carrier Sterling this week joined a list of more than two dozen carriers that have gone bust this year.

"Everyone is saying I will wait for my colleague to collapse first, just to give me a bit of oxygen for a few months," said Marc Rochet, head of all-business-class airline l'Avion, recently swallowed by British Airways Plc.

Still, some airlines put a brave face on the crisis with upbeat growth targets, saying the rebound may be strong if they can hold on until 2010. One expert accused them of bluffing.

"Nobody wants to be the first to give bad news. Everyone is lying to each other," Ralph Kaiser, head of corporate travel payments system UATP, told delegates.

Air traffic historically tends to grow at twice the level of gross economic product, but global international traffic fell in September for the first time in five years.

Industry icon Bob Crandall, the former American Airlines chief credited with introducing changes such as yield management, said the correlation between growth and traffic was unlikely to be re-established and the industry must brace for a long crisis.

"My prediction is the world's financial difficulties will be much worse than most of us think," he said.

Debt cure
Many airlines are losing money in an industry which, at the best of times, has rarely been able to generate fat margins.

"Those who come out will be those who enter the crisis with solid finances and low debt," Spinetta said.

Air France-KLM is vying with Lufthansa for a stake in rescued Alitalia, following a state spin-off of bad assets, and until recently was eyeing Austrian Airlines.

Alitalia, weeks away from running out of cash as it seeks to escape insolvency, received a lift on Friday when four unions agreed a conditional deal with local investor group CAI, assembled to rescue the Italian flag carrier. But doubts remained over whether unions would sign up.

Airlines were pummeled by record oil prices which peaked at around $150 a barrel in the summer before dropping back below $70.

Many imposed fuel surcharges, but the recent traffic drop and abrupt economic slowdown could bar their escape route.

"In July everyone said their costs were out of control. They were able to pass on fuel costs, but now it is not certain they will be able to and that is going to increase pressure," Bjorn Naf, chief executive of Bahrain's Gulf Air told the forum.

Long-term, unless oil collapses, the industry faces the challenge of persuading consumers to pay higher prices.

"We are in a hiatus and that is why there is so much drama going on in the industry," Virgin Atlantic Chief Executive Steve Ridgway told Reuters in an interview this week.

Although such price tags spell misery for Western airlines and consumers, airlines and airports from the oil-fired Gulf drew a contrast with growth in their region, saying it would be sustained by the diversification of their economies.

The head of Dubai Airports, Paul Griffiths, called the financial crisis a "blip" that will not deter the southern Gulf emirate from plans to build the world's largest airport — covering twice the size of the territory of Hong Kong.

"People (in the global airline industry) will continue merging or go bankrupt and disappear. But Gulf carriers will keep growing and weather the storm," Gulf Air's Naf said.

Non-OPEC Bahrain, a relatively minor oil producer situated 30 minutes' drive from Saudi Arabia's wealthy Eastern Province, aims to carve a niche for its still loss-making airline with fast transit times. Three billion people can be reached in five hours' flying time from the Gulf using new planes, Naf said.