Bankruptcies are nothing new to the airline industry, which has seen hundreds of carriers become defunct since the infancy of the business. But a recent spate of bankruptcies by several prominent carriers--including Frontier Airlines (FRNTQ), Aloha Airlines, ATA Airlines, and Skybus--has spooked the industry and investors. While the demise of these carriers was preceded by cutthroat competitive dynamics and faltering liquidity, it seems that escalating oil prices (and in Frontier's case, nervous counterparties) finally pushed them over the edge.
Deteriorating Industry Fundamentals
With oil prices topping more than $130 per barrel, more carriers are in danger than ever before. A lethal combination of high oil prices, falling domestic demand, and unwieldy debt loads makes for treacherous terrain in this notoriously cyclical industry. Fuel now represents the single largest expense item at more than 30% of costs (exceeding labor costs), and inflation-adjusted fuel prices now exceed all-time highs reached back in the 1970s.
To view this article, become a Morningstar Basic member.
Marisa Thompson does not own shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.