KEY POINTS:
Casualties are mounting among airlines as they face fuel bills US$70 billion ($89 billion) bigger than last year.
The pace of merger talks is also quickening and profit warnings are getting louder by the day.
In the United States and Europe, the downturn is likely to be far
more painful than any that have been experienced over the last 25 years.
Airlines operating in New Zealand are better positioned than many, but still face cost cuts and further airfare increases, analysts say.
London aviation analyst Chris Tarry says airlines may lose as much as US$40 billion this year, more than three times the deficit recorded in 2001 after the September 11 terrorist attacks.
Oil's spike to a record above US$135 a barrel last week came as American Airlines announced its sharpest cutbacks since September 11, including thousands of layoffs.
Air France KLM has warned it would have to expect a ¬1.1 billion ($2.25 billion) rise in fuel costs, squeezing profits this year and forcing it to find ¬150 million in savings.
It now expects operating profits to fall 30 per cent from the year that ended in March.
Qantas announced on Thursday an across-the-board fare increase of nearly 4 per cent, the second of such a magnitude in a month as it has to pay an extra A$2 billion ($2.4 billion) for fuel this year.
"'We are continuing to target further efficiency improvements which now include a review of the network and schedules of Qantas, QantasLink and Jetstar," chief executive Geoff Dixon said.
Air New Zealand has already issued a profit warning, raised fares and has said it may need to reduce the frequency of flight routes by the end of the year.
British Airways has floated the prospect of zero profits.
Oil prices have surged 170 per cent since the start of 2007 and eight small airlines have entered bankruptcy or stopped operating in the past five months, including US-based transatlantic all-business carrier Eos and budget airlines ATA and Aloha.
American Airlines said on Tuesday it plans to chop its US capacity by up to 12 per cent in the fourth quarter and begin charging passengers US$15 to check a single bag.
Peter Harbison, chairman of the Centre for Asia Pacific Aviation, said the aviation industry reached tipping point last week with the American Airlines announcement and profit warnings. But in Australia, at least, airlines were sitting under a hole in the cloud for the time being.
"Consumer sentiment seems pretty high. Qantas can put prices up at the moment but airlines cannot make money when oil gets above US$135 a barrel. It all depends how long consumer demand can hold up," he said.
The sharp decline in premium class bookings from Europe to the Southwest Pacific this year is of concern to all airlines as that is where they make most of their money.
Low-cost carriers in this region have comparatively modern, fuel efficient fleets and Harbison said he did not think they would be hit harder than anyone else.
"I don't see any budget carriers being threatened quite frankly. I don't think Pacific Blue is going to disappear from New Zealand. They might change things a bit but basically all airlines are going to lose money."
Marcus Curley, head of research at Goldman Sachs JBWere in Auckland, said so far the airline squeeze was felt most acutely in the United States where balance sheets were thin and much of the fleet is old.
"That's not to say that the airlines in this region are not going to face slower revenue growth. Airfares are going up on a daily basis and that must have an impact on demand."
New Zealanders heading overseas would be first to curtail travel. But Air New Zealand had already reduced costs, cut non-productive routes refined their product.
"They could not be better positioned and will fare better than other airlines but that may not be saying much. There are very large headwinds that they are facing."
Pacific Blue's New Zealand manager Adrian Hamilton-Manns said airlines had to learn to adapt. Pacific Blue was increasing the frequency of transtasman flights and bookings had been strong for a new Dunedin service which starts on July 1.
"We're taking a bullish and headstrong view that the market will still be there."
Head of research at Forsyth Barr Rob Mercer said Air New Zealand was in a good position. Its strong balance sheet and low debt meant it could put maximum effort into operating the business when competitors may not be in such a happy position.
"They still have the ability to make a profit in the current environment. I'm not too worried about them coming through in good shape."
The delay of Boeing 787 deliveries had worked in its favour by pushing out capital spending at a tough time.
- Additional reporting: Agencies
