Global Processing

Brazil''s Embraer sees airlines cutting seats to face oil spike

June 9, 2008
Reuters is reporting that airlines must slash unprofitable routes and raise passenger ticket prices to survive an industry disaster threatened by high fuel prices, Brazilian aircraft manufacturer Embraer warned recently.

Many traditional carriers have already slashed costs in the face of competition from low-cost airlines but only tough measures to boost revenues will allow many of them to ride out what could be a five-year downturn in air travel, it said.

The stark warning contrasts with booming demand for business jets reported by the same company recently.

Some premium customers, who make up most of the profits of traditional carriers, are defecting to business jets, finding them safer and more efficient than braving congested airports.

Embraer, which started out making planes for the Brazilian air force, is a leading manufacturer of regional jets sitting between 50 and 120 passengers and which feed into big airline networks. Since 2002 it has expanded into small executive jets.

Although many passengers reach their destinations fuming about overcrowded aircraft, many airlines only manage current high load factors by selling unsold seats at a steep discount.

According to Luiz Sergio Chiessi, Embraer''s vice president of airline market intelligence, that masks a deeper industry problem of overcapacity as the economy heads towards recession.

Airlines are used to sharp swings in business cycles but this time fuel costs are biting harder than ever.

Revenues per passenger and for the distance flown are the make-or-break benchmark for the airline industry.

With fuel prices eating up an escalating proportion of total costs and airlines unable to trim much more fat after years of cost-cutting, some carriers must boost yield by raising prices.

Market forces mean one way to achieve that is to offer fewer seats, a cull already well under way in the United States.

Continental Airlines Inc said recently it would cut 3,000 jobs, or about 6.5 percent of its work force, and retire 67 older planes as it grapples with unprecedented oil prices, which have doubled in the past year.

On Tuesday, UAL Corp''s United Airlines announced plans to slash jobs and flights, following a similar move by AMR Corp''s American Airlines last month.

And Australia''s Qantas Airways Ltd said last month it planned to cut some domestic routes in response to an estimated $1.9 billion upcoming rise in its 2008/09 fuel bill.

The airline raised prices on domestic and foreign routes.