05 July 2008

Even Moody's says there is a problem with the US Airlines Model

So finally someone else has the balls to come out and say what we have been saying for some time. The US Airlines model is unsustainable. DUH!!!

Here is the Release that came out via Marketwatch quoting The Times (of London)

Moody's: Many US airline business models 'unsustainable'

LONDON (MarketWatch.com) -- Moody's Investors Service, a unit of Moody's Corp., has described the business model of many U.S. airline carriers as "unsustainable," the Times in London reported Saturday, citing a note from the credit ratings agency.

The agency's analysts said U.S. airlines are particularly vulnerable to high oil prices and even large carriers could be forced into bankruptcy, according to the report.

Moody's said with many airlines seeing a more than 30% year-on-year increase in their fuel costs, with nearly 50% of an average ticket consumed by fuel, they are left with inadequate funds to cover other key costs such as labor, equipment rentals, debt service and overhead, the newspaper added.

"Without an ability to cover costs and earn an adequate return, the business model for most airlines cannot be sustained under current fuel price conditions," Moody's said, according to the Times.

The agency said airlines will not be able to cost-cut or capacity-reduce their way back to profitability, and long-term industry viability will depend upon a pricing environment in which airlines can adequately recover the significant costs of fuel, labor and capital investment.

So ...

What does this tell us. That the model is broken and needs to be fixed. Remember how the US and many other economists "fixed" the Cost of Living index? They took out Fuel and other elements from the basket.

So I have proposed several times now that we need to do the same. Fuel should become - at least for the short term a broken out and payable sum of money to the airlines in any ticket you buy. This then allows us to get round to solving the problem of the airlines business models themselves which are decidedly broken.

Thanks JohnS for the coverage of this note.

Chaps - get with the program - neither the government or IATA should get involved in bailing out the airlines at this point. But by regulating how prices are displayed can really help the issue and will force the airlines to address their real costs and their broken business models.

Its how the rest of the world does it - and they can make money - so I have no sympathy for the airlines just because they refuse to address the pachyderm on the table!



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