STORIES of airlines in trouble or brought crashing down to earth in a financial fireball because of the high costs of fuel have become commonplace. Around 30 have already gone bankrupt this year, most prominently Aloha, ATA, Zoom and XL — while, losing $3 million a day, Alitalia totters on the edge. If Delta and Northwest in the US have gone for merger in the act of self-preservation and in the process creating the world’s biggest airline — their shareholders voted on the deal yesterday — it is no guarantee that it will save them in the long run. Earlier this month it was predicted by the CEO of British Airways that another 30 airlines could go bust before the end of the December — and he was talking before the international financial crisis. India will be particularly hit if the head of the International Air Transport Association is right. In Delhi two days ago, he said that the industry there would be the second worst affected after that in the US unless the Indian government takes action and cuts it tax on aviation fuel. After two years of spectacular growth, airlines in India are expected to make a $1.5-billion loss this year.
That carriers in India or the US or Europe should be in trouble in the present uncertain climate with fuel prices double what they were last year is understandable. What has come as a surprise to many, however, is that airlines in this part of the world are being hit as well. The low-fare Saudi carrier Sama has had to cut some of its domestic routes, even though they were operating at near capacity, and may be forced to suspend all of them because of fuel costs.
Most people, especially abroad, could be forgiven for imagining that airlines here, private as well as public, are protected from economic reality because they have access to cheap subsidies supplies. That is not the case for the private airlines and it would not be surprising if others in the region followed Sama’s lead and retrenched or, worse, went out of business altogether.
The cost of fuel, in fact, is only part of the problem. Sama’s difficulties, like those of many other carriers, have been compounded by insufficient capitalization to cover running costs. In its case, that appears now to be covered through a fresh injection of capital. Airlines elsewhere may not be so fortunate. The Saudi market is awash with liquidity looking for a home — unlike much of the rest of the world where it is credit crunch time. With the markets still volatile, that is going to be the killer for many airlines, some of whom, even a couple of weeks ago, thought that they would just manage to survive the fuel crisis. Only those with plenty of cash in hand to hedge fuel costs are going to survive relatively unscathed. Even state-owned airlines which can call on government funding to keep them flying are going to find it difficult — and many of them in the region would have already gone to the wall had it not been for that support.
That puts the spotlight on the government’s privatization commitment.
The difficulties confronting Sama would not have been as great if Saudia had to pay the full price of fuel. Its access to subsidized fuel is distorting the market and prevents its competitors from passing on the increased costs to the customer.
With Saudi inflation still at painful rates (slightly down to 10.9 percent last month compared to 11.1 percent in July), keeping any prices down is welcome, but this should not be at the cost of a level playing field.
