NEW YORK (Reuters) - British Airways’ chief executive expects more failures and more mergers in the air industry this year as carriers face the challenges of soaring oil prices and a weak U.S. economy.
The British flag carrier, which reported a 45 percent surge in annual profit last week, has cut costs and introduced surcharges to counter rising fuel prices, but admits that this year will be “challenging.”
“I suspect that many airlines out there that struggled when fuel was less than $100 a barrel are not going to be able to take the required actions and we will see further failures,” said Willie Walsh, speaking at an investor presentation in New York on Monday.
With crude oil cresting $127 a barrel, roughly twice its price a year ago, and the U.S. economy dangerously close to a recession, seven airlines have already declared bankruptcy or stopped operating in the past five months.
“Clearly, bankruptcy is an effective form of consolidation, as they (failed airlines) take their capacity out of the market,” said Walsh.
Two of the recently failed carriers, Eos Airlines and MAXjet Airways Inc, were in direct competition with British Airways, offering business-class only flights between London and New York, one of its most lucrative markets.
Despite that easing of competition, British Airways said transatlantic business has been declining because of the slowing U.S. economy and weak dollar. It is “inevitable” that the airline will cut its capacity for the usually low-demand winter season, Walsh said, but gave no further details.
Mergers will consolidate the industry further, Walsh said on Monday, which will follow Delta Air Lines’s deal to buy rival Northwest Airlines Corp, announced a month ago.
“The high oil price combined with the economic slowdown may well have made it an imperative for many (airlines) to consider consolidation,” he said. “We will see meaningful consolidation, sooner rather than later.”
In April, British Airways said it was in talks with U.S. rivals Continental Airlines and AMR Corp’s American Airlines, which a source briefed on the matter said was about a cost-saving alliance.
Walsh declined to elaborate on that on Monday, but said the impetus for a deal was coming more from the U.S. side, as looming merger deals force U.S. carriers to rethink their transatlantic alliances.
British Airways said last week that the current quarter would be “particularly difficult”, as it grapples with rising fuel, the sinking economy and a delay in moving some flights over to its new Terminal 5 at London’s Heathrow airport.
Terminal 5’s opening at the end of March descended into chaos as hundreds of flights were cancelled, passengers stranded and baggage lost.
Walsh declined to criticize Boeing Co, which has pushed delivery of the first of British Airways’ 787 Dreamliners to 2012 at the earliest, long after the original target of August 2010.
“These are large-scale projects, and having gone through T5 — which is a much smaller scale project — and witnessed what can go wrong, I suppose I should have sympathy for these guys more than anybody else.”
The airline is still in discussions with the U.S. plane maker about how to deal with the shortage of planes caused by the 787 delay, said Walsh. Airbus, a unit of Europe’s EADS, is still set to deliver the first of British Airways’ A380 superjumbos in 2012, Walsh said, in line with the original schedule, despite recent delays.
British Airways is still on track to launch the first flight of its new OpenSkies unit between Paris and New York on June 19, Walsh added.
British Airways is the first major airline to take advantage of the first stage of the “open skies” agreement, introduced in March, that allows U.S. and EU airlines to access any U.S. city from any point in the European Union and vice versa.
Reporting by Bill Rigby; Editing by Brian Moss; editing by Carol Bishopric