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Oil crisis could lead to industry catastrophe

The gist of a report issued last week by the Business Travel Coalition (BTC) is summed up in its title: “Oil Prices and the Looming U.S. Aviation Catastrophe.”

The study, performed for the BTC by AirlineForecasts, warns that the effects of high fuel costs will be dire. “AirlineForecasts concludes that if oil prices stay anywhere near $130/barrel, all major legacy airlines will be in default on various debt covenants by the end of 2008 or early 2009.”

Defaulting on debt covenants may sound like financial gobbledegook, but it has serious real-world consequences. As the study warns, “The implication is that several large and small airlines will ultimately end up in bankruptcy, and of those, some will be forced to liquidate.”

Meanwhile, on Monday the Bureau of Transportation Statistics released a report summarizing the industry’s financial performance for the first quarter of 2008. Bottom line: The seven largest U.S. airlines combined for a net loss of $1.3 billion between January 1 and March 31. That’s the second quarterly loss in a row, after six consecutive quarters of industry profitability.

If sustained over multiple quarters, losses of this magnitude could erode airlines’ ability to service their debt. And stave off bankruptcy. And avoid outright liquidation.

So, will today’s crisis become tomorrow’s catastrophe? The answer depends on the movement of a single variable. If fuel prices remain high, the industry, and the traveling public, will have to reckon with a significant number of failed carriers.

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