Airlines cry over the surging oil prices: Up into the unknown.
May 22nd, 2008 by Kathy Ptouchkina | Leave a comment on this post below!Do you remember your first time in a plane and that uncomfortable feeling when it was just about to take off? It’s picking up speed and soon enough you feel that the ground has been taken from underneath your feet and the plane is rapidly ascending upwards. Well, the CEOs of the major airline companies are probably feeling that same feeling as crude futures shoot up to a fourth straight record this week.
The oil prices just keep rising, setting up new records every week. Crude futures marked the new high of $133.17 a barrel in New York today. But the market closing wasn’t enough to stop the rise and oil continued to surge in electronic trading reaching $134 a barrel. AMR Corp. Chairman and Chief Executive Gerard Arpey:
The airline industry as it is constituted today was not built to withstand oil prices at $125 a barrel, and certainly not when record fuel expenses are coupled with a weak U.S. economy. Our company and industry simply cannot afford to sit by hoping for industry and market conditions to improve.
The question is who will the first to respond to a rapidly changing situation on the oil market. While most of the airlines are sitting tight hoping for this to be over soon, AMR Corp. “became the first U.S. carrier to make more moves to deal with still-surging fuel coasts”. According to Wall Street Journal, AMR Corp. is planning U.S. capacity cuts, a retirement of at least 75 aircrafts, and institution of additional passenger fees, including charging fliers $15 for their first checked bag. All measures are being implemented in an attempt to combat rising fuel costs.
However, the market response to the oil prices and new operation changes instituted by AMR sent their shares tumbling almost 15%. The market is not the only one with the negative response to the actions of airline companies. The heavy weight of rising fuel prices on consumers coupled with additional fees for almost any service provided by airline companies make air travel close to becoming unaffordable. As a result, economists expect that the next hit will come from consumers’ side who will switch their preferences to other means of transportation. With the surging operational costs and potential decrease in demand what will it mean for airline industry? What options does it have for bouncing back into the profit maximization game? Small talks about nationalization of the industry can be caught on recent economics blogs. Airlines cry over the surging oil prices: up into the unknown.
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