A host of smaller European airlines are likely to go bankrupt in coming months if the oil price does not drop significantly below current levels of USD$130 a barrel.
Faced with the unprecedentedly high cost of fuel, airlines will have to hedge against the oil price and cut unprofitable flights and routes to help them stay in the air.
Pressure on airline profit margins will be exacerbated by a slowdown in demand from consumers, as well.
Short-haul weekend breaks or second holidays are expected to be high up the list of cost cuts as household bills are inflated by rising fuel, utility and food prices.
Overall, 24 airlines have gone bust around the world this year and just under half were based in Europe, according to the International Air Transport Association (IATA).
The transatlantic business class-only airline model has been wiped out.
Britain's Silverjet was forced to call in the administrators at the end of last month due to a lack of funds, following the demise of rivals MAXjet and Eos Airlines.
Now the regular and low-cost airline models are also under threat as profits plunge.
"Airlines are facing their hardest time since 2001, and it would be normal to expect some bankruptcies across the industry," said Andy Clarke, director of air transport policy at the European Regions Airline Association (ERA).
"Certain low-budget airlines won't be able to compete effectively as margins tighten and fuel costs spiral upwards," added Mark Fennessy, restructuring lawyer at law firm Orrick in London.
"In my view, the majors (Air France, Lufthansa and British Airways) and major low-budget airlines (Ryanair and easyJet) will survive although they may have to drop some unprofitable routes," he said.
Andrew Fitchie, airlines analyst at broker Collins Stewart agreed that changes would have to be made.
"In the short term, the only differentiating factor is whether [an airline] has fuel hedging or not... Those who survive must substantially cut back on capacity -- they can cut out the loss-making services and focus on what makes money," he said.
Michael O'Leary, chief executive of Ryanair, spelt out the severity of the problem at the airline's annual results presentation last week.
He said that if oil remained at USD$130 a barrel, the group's profits of nearly EUR500 million euros (USD$780.4 million) would be wiped out in the year to end March 2009.
In what O'Leary admits was a mistake, Ryanair has not hedged at all on the assumption that oil would eventually fall -- meaning it pays the highest possible price for fuel.
In contrast, British Airways has 70 percent of its fuel hedged at USD$82 a barrel for the first quarter of this year, dropping to 55 percent at USD$90 in the fourth quarter.
However, if oil remains high the British carrier will bear the brunt eventually as the terms of its hedging deteriorate.
"Hedging is not really a solution. It doesn't allow you to escape the impact -- it just defers it," said Douglas O'Neill, transport analyst at Blue Oar Securities.
He added that cutting capacity was a better strategy, and a sign of good management rather than weakness. "It's a sensible reaction to the fact that some routes are not making money anymore," he said.
O'Leary said he was prepared to cut capacity on routes where there are several flights a day, rather than cutting out a route completely.
British Airways signaled last week that it would cut capacity later this year, with details still to be finalized.
O'Leary was characteristically blunt about which airlines were in trouble, naming Slovakia's SkyEurope as a possible casualty by the end of the summer. Small British airlines such as Jet2, FlyGlobespan and Flybe were also on his list, prompting fierce denials from the parties involved.
Flybe said oil would have to reach USD$170 a barrel for its profits to be reduced to zero, while Jet2 was equally defiant.
"We are fully hedged for this summer, next winter and substantially for next summer," said Andrew Merrick, finance director of Jet2 parent Dart Group, although the firm did put out a profit warning on February due to a disappointing performance last winter.
Merrick said Jet2, which operates from airports in Northern England and Scotland, was happy with its volume of summer bookings, but Blue Oar's O'Neill said that the predicament of some airlines was being obscured by the high summer season.
He said that the onset of the quieter autumn and winter period could come alongside slowing demand from the consumer.
"At this time of year, airline cash flow is strong, but after the summer is over, you can't rule anything out," he said.
