Airline Companies

There are two advantages to consolidating airlines, as it usually cuts down on operational redundancies and increases revenue through higher tariffs. The problems associated with falling demand from consumers have been exacerbated by the simultaneous increase in the price of crude oils, which represent 30% of an airline's typical operational expenses and are the largest expenditure for airlines.

While some companies like Southwest had the vision to hedge low petrol rates, most carriers, even those with the two biggest by sales air fares - American and United - have no hedge strategy in the near term and will be hit hardest if further increases in the price of crude are seen.

Capacity utilisation of aircraft: For an airline, the most fundamental indicator is capacity utilisation. It is a measurement of the mean number of times each airplane flies in each 24-hour interval. One part of the "art" of managing an airline is to keep the load factor high. ASM metrics are used to monitor the number of seats offered by airline companies.

R&M is a measure of the number of airline passenger seats for which R&M has generated income. Earnings per risk-weighted unit are referred to as the airline's rate of return. One cent for the large carriers in the first half of 2007 [obligation to quote]. Fuels costs: The majority of elements affecting the viability of airline companies are fairly robust, with the exception of the cost of gas.

The cost of fuels is extremely vulnerable to the danger of peak oil. In January 2009, aircraft averaged $1.76 per gallon per gallon in aircraft aviation cost fuel[2]. In a recently published article, Joseph Weisenthal said Airline-In-A-Box: Hardly any other company has as many factors and faces as airline companies. Airline companies are reliant on fossile fuels and are often exposed to the variability of petrol prices.

Following the September 11 episodes, the local aeronautical manufacturing sector plunged into a steep free fall, leading to the consolidations of several carriers and the insolvency of others. Removing airline companies through consolidations or insolvencies benefits both revenue - through higher tariffs - and cost by removing unnecessary expenditure and overhead. Further terrorists' acts or a decline in the entire German inland sector could speed up consolidations as less powerful carriers are taken over by strong ones or become bankrupt.

Air carriers around the world have also tried to divide the cost through partnership or alliance. These arrangements allow airline companies to divide equipment and operating cost (e.g. service equipment, selling offices) and to bargain for bulk rebates on largecurements. Customers profit from lower fares (due to lower costs) as well as optimised itineraries and bundled fidelity bonuses, especially in cross-border traffic.

Ever since the beginning of the aviation industry's de-regulation, the airline's property has been restricted to companies and individual persons of the respective state. As a result, larger scale cross-border merger and acquisition activity was avoided. Recently, the US administration heralded its intention to loosen these rules and clear the way for global M&A deal in the aviation sector.

This could lead to significant savings and synergies in the fast worsening sector. There are three main international alliances: The price of crude is an important determinant of flight operation as the price of jet fuels is directly related to the price of the crude that has to be refined to make jet fuels. Fuels account for about 34% of an airline's total airline expenses in 2008, compared to about 13% in 2002.

This figure will rise to almost 50% for low-cost carriers such as AirTran and BlueJets. The price of kerosene at the beginning of the year was USD 850 per tonne. Aviation fuels are strongly related to commercial oil price trends, which have increased significantly in recent years. At the same time, the equity price of German carriers tends to correlate strongly and adversely with kerosene fares, reflecting the vulnerability of this historic low-margin transaction to the costs of fuels.

A number of airline companies have used hedging to fix petrol costs and thus isolate themselves from fluctuations in petrol costs. The Southwest was perhaps the most forward-looking of all airline companies and has secured substantial parts of its aviation costs until 2010 at various per capita rates below the prevailing commercial level. It will benefit from the advantages in comparison with other carriers if crude gas continues to increase or remains at present level.

However, if fares drop below Southwest's coverage level, they are at a competitive cost compared to other carriers. By contrast, American Airways and United Airways will no longer have scheduled commodity price swaps in the near term from 2008. Others have finite residual hedge contracts. There are two main motivations for corporate trips in the airline sector.

Secondly, corporate trips are less resilient changes in macroeconomic trends than recreational trips, which can be seen as a kind of luxuries. Some one-third of the total transport and capacities of the main airlines are accounted for by cross-border tourism. Compared to the same 2006 season in 2007, these large airlines recorded an approximately 5% growth in the volume of foreign tourism, which is quicker than the relatively low level of national tourism.

A large part of the increase in national traffic was absorbed by local discounting companies such as Southwest and AirTran. From 1990 to 2006, the Air Transportation Association of America reported that local airline companies recorded a $22 billion accumulated deficit on $1,866 billion accumulated revenue.

No fewer than 137 airline companies have applied for insolvency cover since 1978, when air transport was liberalised. Part of the explanation why the big companies have a higher insolvency rate is that they use vast quantities of solid assets - wide-body planes cost $100 million each and cannot be easily wound up, which is why many companies do not own their planes but rent them.

Airline companies also rely on a well-qualified workforce that needs a large amount of money for education, social security and pension. For much of the airlines' histories, the commercial practises involved'bundling' all travelling expenses into a common fare. Even though some airline companies in different parts of the globe have had some "unbundling" of the cost of ticketing to varying extents, since the rise in the cost of petrol in the Summer of 2008, many airline companies have decided to expand the use of this option, e.g. by imposing a charge on the passengers for each item of hold baggage[12].