Fuel suppliers demand airlines pay cash in advance

From The TimesMay 26, 2008

Carl Mortished and Amanda Andrews
Airlines are being forced to pay cash in advance for jet fuel as the major oil companies tighten the screws on an industry that is being crushed by an extraordinary surge in the price of crude oil.

Sources within the airline industry indicate that credit is being denied to most of the leading American carriers and the practice is moving to Europe and Asia. So uncertain is the cash solvency of the industry that jet fuel suppliers insist on prepayments into special bank accounts.

A credit controller at a leading European multinational oil company told The Times that the oil industry was moving to jet fuel prepayment. “It’s common in the US and it is moving to Europe. We have been moving to prepayment since Swissair went bust.”

The need to put up money before delivery of fuel is a huge financial burden that has been shifted from the oil companies to the airlines. According to John Armbrust, a US jet fuel consultant, the oil industry had $5 billion (£2.5 billion) of jet fuel credit outstanding to airlines before the 9/11 terrorist attacks. Now they are demanding that airlines leave cash on deposit.

“The airlines can’t afford it. Traditionally, oil companies extended credit for 14 or 21 days and some as long as 30 days. Now, most American airlines are on prepay. South West is one of a few likely to still get credit.”

The extent of the cash squeeze was highlighted last week when American Airlines said that it would charge $15 per bag checked even as it revealed plans to shed 75 aircraft, shrinking the airline’s capacity by 12 per cent.

The price of jet fuel has risen by 60 per cent since January and American Airlines paid $665 million more for fuel in the first quarter of this year than in the same period of 2007.

The credit crunch is likely to worsen and a number of financial institutions will fail, according to research from Atradius, the credit insurance group which conducted a global survey of its customers’ views of the financial outlook. Although Atradius said that companies expect the number of failures to be small, about 65 per cent expect there to be failures.

The group added that direct exposure to sub-prime lending is higher in Europe than in the United States even though the bulk of the sub-prime mortgage defaults are in the US and many of the securities these loans are packaged into would have originated from US-based mortgage companies.

“Some explanation for this may be investments by European companies in US securities offering higher returns and more frequent use of secondary financial markets to securitise receivables by European countries,” it said.

Atradius added that only 12 per cent of companies across the world do not expect an economic slowdown in the next year. In Britain, more than 90 per cent of companies surveyed expect a slowdown, the highest percentage. About one in six companies expects a slowdown of only the national economy; a quarter expect a slowdown of the global economy and half expect a slowdown of both. The expectation of a slowdown is also high in Mexico, the United States, Spain, Italy, France and Belgium and lowest in Sweden and the Netherlands.

Atradius found that larger companies are more likely to have been affected by the credit crisis. Although fewer than 30 per cent of small companies reported an impact, almost half of all large companies (with more than €1 billion annual gross sales) said that they had felt the credit-crisis pinch.

Companies operating within the energy industry have been especially affected, but those in the healthcare and services industries reported a relatively low frequency of impact.