It seems big business, especially the US car industry and the aviation industry, is rapidly getting the message that high oil and petrol prices are here to stay and they have started adjusting their business plans accordingly.

The Ford Motor Company overnight became the first major US company to signal a change in direction because of the surging cost of fuel.

Ford’s aim is simple: to lower its production costs and improve its sales based on the expectation that petrol and oil prices will remain around present levels for at least the next 18 months. Ford says it is cutting production of the petrol chewing Sports Utility Vehicles and pick up trucks that have been the mainstay of its business and marginal profits for the best part of two decades.

Instead it will switch to making smaller cars and so-called cross over versions of existing models. As a result its forecast of a return to profits in 2009 is now off and the company faces a couple of years of more losses as it re-orientates its business.

Ford said American petrol prices to remain in the range of $US3.75 to $US4.25 a gallon through the end of 2009. That’s why the company revealed deep production cuts for what has been its best selling and most profitable vehicles for several decades and could lead to more plant closings and job cuts down the road.

However, the aviation industry stands to lose the most out of surging oil and petrol prices. The necessity to drive is more vital for every day life than to fly, and this is already showing up

Qantas is doing its best to survive and has just lifted air fares for the second time in a month.

Qantas said yesterday international air fares would rise by around 4% and domestic fares by about 3% for tickets issued in Australia from June 4. The increases follow hikes of about 3% for international fares and 3.5% for domestic fares from May 9.

Qantas chief executive Geoff Dixon said the increases were unavoidable given the continuing high costs of oil. Qantas said jet fuel in Singapore was costing around $US166 a barrel this week Singapore.

Virgin Blue has already downgraded its profit outlook for the year to June and that has forced its big shareholder, Toll to postpone the sale of the stake to raise new capital.

Dixon said the carrier was continuing to target further efficiency improvements which now include a review of the network and schedules of Qantas, QantasLink and Jetstar. That could include following US and European airlines which are retiring planes and cancelling routes and consolidating services.

AMR shareholders were told this week that American Airlines, the world’s biggest, would take 85 planes out of its fleet over the rest of the year (that’s like removing a fleet a bit larger than Virgin Blue in Australia), cancel routes in all areas of the business, sack thousands of employees, charge many of its passengers $US15 for their first checked bag, becoming the first airline to do so after several had already started charging for second checked bags.

American is also adding fees for services related to reservations, oversized bags and pets.

British Airways doubled profit in 2008 and the shares then fell when the management owned up to the possibility that 2008’s profit of more than 900 million pounds could be wiped out and the airline might find it self at break even in 2009 because of the impact of higher fuel costs and the debacle known as Heathrow Terminal 5.

Management warned this week that weaker airlines would fail and the share price of it and other airlines in Europe tumbled. More than half a dozen US and Asian airlines, mostly low cost budget operators, have already gone broke this year. BA plans to take planes out of service, cancel routes and layoff temporary staff later this year. It like many other airlines (especially in the US) are flying slower to use less fuel.

There was an estimate yesterday in the US that the delays caused by slower flying and the now normal congestion at US airports, is costing $US41 billion in additional costs, much of it for fuel. Airlines sometimes use more fuel taxing in the US than they do flying slower once in the air.

Europe’s biggest airline, Air France-KLM Group had its first quarterly loss since 2003 and forecast a 30% drop in 2009 earnings thanks to rising fuel costs and the slowdown in the uS and Europe. The loss of $US856 million in the fourth quarter ended March 31 also included a charge against an air freight price-fixing probe from the US which has ensnared Qantas as well as Korean and other major airlines.

Air France-KLM had a loss before the one off charge in the fourth quarter, but a profit for all of 2008. The airline increased its fuel surcharge 12 times in the year.

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Peter Fray
Peter Fray
Editor-in-chief of Crikey
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