The airline industry got a rare reprieve from the forces of nature as ash from Iceland�s Grimsvotn volcano has turned out to be less costly than initially feared � about $50 million compared to the $1.8 billion airlines lost in the eruption of another volcano last year.�
Still, devastating tornadoes and severe thunderstorms in the U.S. managed to wreak enough havoc on their own.
This week�s volcanoes and tornadoes � combined with devastating storms last winter � illustrate how vulnerable airline operations and earnings are to Mother Nature. Airlines like Delta (NYSE:DAL), United Continental (NYSE:UAL), AMR Corp.’s (NYSE:AMR) American Airlines, US Airways (NYSE:LCC) and Southwest (NYSE:LUV) know well how tough an adversary such occurrences can be.� The carriers have had to contend with weather-related losses in the hundreds of millions of dollars since last winter�s multiple storms paralyzed airline operations, and stranded passengers.
Fortunately, only about 500 of the 29,000 flights scheduled across Europe were canceled on Tuesday as opposed to the more than 100,000 flights grounded across the continent with last year�s eruption of Iceland�s Eyjafjallajokull volcano.
Inclement weather in the U.S. isn�t making life fun either. Massive tornado outbreaks in the Midwest have wreaked havoc on flights over the past week.� American canceled nearly 600 flights on Wednesday and is inspecting 89 of its aircraft for possible hail damage.� Southwest also pulled eight planes for damage inspections.� By Wednesday afternoon, some 10,000 airline passengers were stranded at Dallas-Fort Worth Airport alone.�
To make matters worse, dangerous thunderstorms and flooding were expected to continue in the nation�s midsection at least through Thursday. That�s bad news for U.S. airlines, which lost some $600 million due to last winter�s storms alone.
No one likes bad weather, but �Acts of God� like these are particularly disruptive to airlines because they operate on margins as slim as 1.4%.� That means they need every penny to pay fuel bills, labor, fleet and other costs.
Airlines save some money by canceling flights early, because they don�t risk the $27,000-a-passenger fine if a flight is delayed on the tarmac for more than three hours.� Still, they lose between 10% and 30% of that revenue because passengers cancel their travel rather than rebook flights � a figure that is compounded over traditional travel holidays like Thanksgiving, Christmas or Memorial Day.
So airlines must find ways to make back that revenue.� The good news: airline passenger revenue rose 12% in April from a year ago, marking the 16th consecutive month of revenue growth, the Air Transport Association reported last week. ATA predicts 1.5% passenger growth this summer and is optimistic that strong international demand will help offset volatile fuel costs.�
The bad news: Bookings for the fall are slowing down, posing yet another headwind for an industry already battling more than its share of turbulence.�
As of this writing, Susan J. Aluise did not hold a position in any of the stocks named here.
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