High fuel costs to trigger airline failures and consolidation, industry chief says

Air Transat and an Air Canada aircraft are seen on the tarmac at Montreal-Trudeau International Airport in Montreal, on Wednesday, April 8, 2020. THE CANADIAN PRESS/Paul Chiasson

RIO DE JANEIRO - Soaring jet fuel prices driven by conflict in the Middle East are likely to push more airlines into bankruptcy and spur more sector consolidation this year and next, the head of the global airline body said on Saturday.

Global airlines are grappling with higher fuel costs driven by the U.S. and Israel’s war with Iran, which has choked jet fuel supplies and disrupted key air corridors, forcing costly detours.

Budget carriers have been among the hardest hit, lacking higher margin revenue streams such as premium cabins, high-paying travelers and credit card loyalty programs.

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The strain is already showing: U.S. budget airline Spirit Airlines collapsed last month, and it will not be the last, said Willie Walsh, director general of the International Air Transport Association, the industry’s main trade body.

“Unfortunately, I think there will be some carriers that will find this high fuel price very difficult to cope with,” Walsh told Reuters at IATA’s annual summit in Rio de Janeiro, adding he expects some airlines to go out of business and others to be acquired by larger carriers.

Airlines are also expected to protect margins by cutting unprofitable routes, while fares, which have surged since the outbreak of the Iran war, are unlikely to come down soon, Walsh said.

Even so, the pressure does not spell the end of the low-cost airline model, which continues to thrive outside the United States, where the big three carriers, United Airlines, Delta Air Lines and American Airlines, are squeezing out budget competitors, Walsh said.

“I don’t see that the low-cost model is broken; in fact, quite the opposite,” he said, highlighting Ryanair’s strong performance in Europe as an example.

There is one blockbuster deal Walsh does not see happening: United Airlines CEO Scott Kirby’s audacious proposal to buy arch rival American Airlines and create a U.S. aviation behemoth. The idea, which surfaced earlier this year, failed to get done despite Kirby raising it with President Donald Trump.

“I don’t think that’s going to happen. I think the regulatory hurdles would be very significant. I don’t know whether that was a genuine effort to pursue consolidation or Scott just trying to stir up some media,” Walsh said.

Middle East airline woes

The Iran conflict has upended traffic flows through Middle Eastern hubs such as Dubai, Doha and Abu Dhabi, creating acute challenges for Gulf carriers including Emirates, Qatar Airways and Etihad.

Walsh said he didn’t think the conflict would do permanent damage to the Gulf as an aviation hub given its strategic geographic importance and the value of the popular Gulf carriers, which account for 14 per cent of global capacity.

“That capacity cannot be replaced by airlines from other regions around the world,” Walsh said.

“Once things settle down, I would expect the Gulf carriers to regain their important position in the market.”

Adding to the strain is the slow pace of aircraft deliveries from Boeing and Airbus, along with engine delays from GE Aerospace and Pratt & Whitney, a unit of RTX, limiting airlines’ ability to expand fleets and improve efficiency.

Walsh said the industry is increasingly frustrated by the delays, particularly as engine makers post strong profits while airlines struggle. He estimates supply chain disruption cost airlines about US$11 billion last year.

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“We’re disappointed that they’re not moving faster. We’re disappointed that they’re not sharing the pain that the airline industry is sharing,” he said.

Aircraft and engine makers have said that much of the delays are out of their control, stemming from post‑pandemic supply chain disruptions and political trade disputes.

Walsh said competition will eventually emerge from China, where Comac is developing aircraft to rival Boeing and Airbus, though it still faces certification hurdles in Europe and the United States and remains reliant on Western engines and avionics.

“Probably 10 to 15 years from now, people won’t just talk about Airbus and Boeing. It’ll be: Airbus, Boeing, Comac,” he said.

As airlines come under financial strain and climate policies lose momentum in the U.S. under Donald Trump, industry leaders have grown more cautious about meeting a 2050 net zero emissions target.

Walsh said IATA is not ready to abandon the goal.

“I certainly believe it’s more challenging to achieve net zero in 2050 because we’ve not made the progress that we had expected to see on the development of sustainable fuels,” he said.

Reporting by Joe Brock; Editing by Sanjeev Miglani and Rod Nickel, Reuters