BTC Warns Congress About Airline Industry Failure

Washington, DC, June 26, 2008 — The Business Travel Coalition (BTC) today expressed to the U.S. House of Representatives, Committee on Small Business, that with oil in a sustained $130 range, the consensus estimate among analysts is that the airline industry will have to shrink 20% to 22%. Recent cuts in capacity, for implementation this fall, add up to just 12 to 13%, so it is likely that decisions to further cut services will need to be taken by Labor Day. This, together with the financial condition of the airlines, and airport-specific characteristics, has led BTC to identify 150 airports that are at risk of losing commercial air services.

Robert Crandall, former chairman of American Airlines stated in today’s Christian Science Monitor: "Unless something is done to move toward some kind of fix, we're going to see every one of our major airlines in bankruptcy." "If that isn't enough of a crisis to alert everybody, then I don't know what it will take."

“Virtually all airlines will be out of cash by early in 2009, if oil stays in its current range. The conundrum airlines face is that in each of the past 4 years, as a group, they have been able to raise fares and fees only $2.7 billion, on an annualized basis, on average — and that was when the economy was better,” stated BTC chairman Kevin Mitchell. “In 2008, the top 10 airlines will pay $19 billion more in fuel bills versus last year, after $6 billion in oil hedges are taken into account. So, there is a $16 billion gap. The consumer, hampered by gas-pump prices, higher food costs, and the prospect of painfully higher winter heating bills, simply is not able to accept price increases anywhere near the level airlines require to make up that $13 billion shortfall.”

Even the high-growth leader Southwest Airlines, with the best oil hedging program and balance sheet in the industry, told a Merrill Lynch conference last week that at $135/barrel it would have to cut routes hundreds at a time. If, as Goldman Sachs and others predict, oil reaches $150/barrel by July 4, then the industry would need to shrink further. At $200/barrel, the industry would need a 40% reduction. A major concern is that there is no assurance that the industry can successfully downsize without collapse, given the bunching-up of several airlines whose equity would be wiped out in the same relative timeframe, assuming $130/barrel oil.

According the Coalition, there are steps Congress can take to help turn this potentially dire situation around. The three most important steps BTC hopes Congress and others will focus on in the near term are (1) policies that would crack down on excessive speculation and possible market manipulation in oil futures, (2) moves to strengthen the U.S. dollar against foreign currencies, and (3) USG pressure on OPEC to increase oil supplies.

In addition to these general policies, BTC respectfully asked Congress to consider immediately suspending federal taxes and fees on U.S. airlines until March 2009, so long as oil prices remain above $100/barrel, and conditioned upon individual airlines opting-in to a series of reforms.

BTC’s proposal is that individual airlines be given the opportunity of opting into a tax-suspension program if they commit to the following reforms:

1. Passenger Protections. Participating airlines would agree to be bound by passenger protections based upon recently-enacted EU consumer-protection laws in air transport that are very clearly written, serve as a global best-practice and have generated data that quantify their effectiveness. Such agreement would be codified in airlines’ contracts of carriage.