easyJet, Europe's second largest low cost carrier and an airline increasingly used by business travellers, issued a profits warning last week. This was a significant act by an airline which has known little but galloping success since its first flights in November 1995.
American Airlines, one of the the world's biggest carrier, said this week it expected to spend $2.98 per gallon on fuel this year, 12.5% more than it calculated just two months ago.
Is the price of fuel now so high that it is affecting airlines' inventory – where they fly and how often?
Certainly the effect the surging price of jet fuel is having is evident wherever you look (see BTE news story: Travel freeze if fuel price goes on rising).
It is, perhaps, the single most crucial item affecting air travel. It is hitting profits and there are the beginnings of signs that carriers are adjusting their inventory to try and cope with this phenomenon. In 2003, according to the Association of European Airlines, fuel accounted for 24% of an airline's direct costs. By 2006, this had risen to 37%.
In May 2003, oil cost $38 a barrel. In January this year it reached $140. According to the International Air Transport Association (IATA) which takes its figures from Platts, an American price monitoring service, the average price of oil this year has been $117.5 a barrel. Thanks to a slight dip, oil is cheaper this week than it was last week (the latest IATA/Platts figures are for the week March 21).
But compared to last month, the price is 7.5% higher and compared to this time last year, it is a whopping 68.8% higher.
When a business traveller buys a ticket on BA for a trip from London to New York, the standard economy seat is £524. About 10% is the fuel surcharge. For a trip from London to Los Angeles, an economy seat is £742 of which about 9% is the fuel surcharge. Other airlines impose similar surcharges.
These are serious figures for travel managers who see their bills rise with no improvement in service. But for airlines the situation is becoming increasingly crucial.
American Airlines said it expected it fuel bill to be $9.29bn this year (that was on March 24) which is $1bn higher than it predicted in mid-January.
In the States, American, United Airlines, Delta Air Lines, Northwest Airlines, AirTran and JetBlue Airways have all cited the soaring cost of fuel as a factor in their fourth quarter losses posted earlier this year.
In Europe Lufthansa reported in its annual accounts that it spent €3.9bn during 2007 on jet fuel, €505m more than in 2006. When easyJet issued its profits warning last week, it said that at current levels, its fuel bill would go up £85m in the six months from April to September. Andy Harrison, its ceo, said: "It is pretty obvious that if the recent significant rise in the fuel price is maintained, then our second half profits will be lower than we had previously expected."
Already American carriers are cutting back on services. Delta and United both announced cuts in domestic services last week. Both airlines are aiming to ground up to 20 aircraft with Delta also looking to 2,000 redundancies.
Delta, which came out of Chapter 11 bankruptcy protection last year, plans to cut about 10% of its domestic capacity by reducing frequency and stopping some point to point services. It also wants to increase it international flights from 25% to 40% of its operation as these are more lucrative.
Edward Bastian, the airline's president and cfo, said at the JP Morgan Aviation and Transportation Conference in New York last week: "Jet fuel prices are up 85% since the beginning of 2007. What's going on with fuel is certainly unprecedented, if not a crisis for the industry."
Another senior airline executive, Bob Fornaro, AirTran ceo, told Reuters: "Fuel is the key issue."
So far there are no signs that European carriers are being hit in the same way as their US airlines. There is no talk of cut backs or standing planes down. But this as Guillaume Bizet, director of air solutions for Carlson Wagonlit Travel in EMEA says, might be just a matter of time. Currently the trend in oil prices is relentlessly upward and this is likely to continue. Few businesses can cope with such rises in the cost of raw materials as aviation is now experiencing and there is only so much you can pass on before customers say "Enough."
This may not be a good time to run an airline.