Airlines gauge earthquake's knock-on effects; fuel tops at 2008 level; Boeing to reduce risk for 737

After the quake shook much of Honshu - sending a tsunami crashing through island's north-east and critically damaging nuclear power plants - immediate tasks for the sector focussed on the safety and wellbeing of those affected.

Amid the threat of aftershocks and further inundation, evacuation flights were mobilised and airline schedules were rearranged to airlift the stranded and reroute services away from damaged airports and regions. Carriers either diverted flights to the nearest alternate hub, rearranged stopovers in either Hong Kong or Seoul to avoid crew staying in Japan or suspended flights altogether, although few would put the cancellations to their press releases.

Then, as the Fukushima Daiichi power plant emergency unfolded, a no-fly zone annexed a sizeable slice of Japanese airspace as the authorities put as much sky as possible between safe and dangerous levels of radioactive contamination.

Airport Geiger counters sprang into action. South Korea reported higher-than-normal levels of radiation were found on the clothing of passengers returning from Japan, although the levels did not appear to be dangerous and no one appeared to be ill. Taiwan and the US reported similar instances as the world's airports prepared to scan passengers for radiation.

A week later, the financial and strategic ramifications were occupying airline management meetings across the globe.

See: Japan crisis: Travellers urged to leave Tokyo, air fares spike, flights cut. 71 airlines hit.

As the Association of Asia Pacific Airlines (AAPA) conceded it expects "some short-term disruption to normal patterns of travel demand to and from Japan", United Continental were the first major US carrier to confirm they had experienced a reduction in travel demand to Japan.

IATA noted it was too soon to judge how the Japanese earthquake and tsunami will affect air travel, but added that "the market is large enough to have a materially adverse impact on the international total".

Boeing VP of marketing, Randy Tinseth, stated the crisis in Japan will be short-term, but it was difficult to foresee the future of the airline industry in Asia after it is resolved. Boeing had enough stock to keep production on the B787 steady for a "few weeks" as its Japanese partners assess the consequences of the quake on component manufacturing.

Most airlines adopted a wait-and-see approach, emphasising their flexibility to leap into action at the next change of events in Japan. Hawaiian Airlines reported "modest" cancellations from its biggest tourist market, however, the state's Governor Neil Abercrombie was apoplectic. "It's going to be terrible. It's going to be rough. It's something that we have to come to grips with," he said.

Philippine Airlines stated it may have to review projections for the fiscal year starting Apr-2011 while Singapore Airlines will delay the launch of A380 services to Narita and Los Angeles due to "lesser demand" for travel to Japan.

Lufthansa's planned alliance with All Nippon Airways, due before the competition authorities mid-year, may be on ice as CEO Christoph Franz stated: "This might change due to current developments."

Malaysia Airlines' MD Azmil Zahruddin believed it was too soon to determine how the quake will affect carriers' earnings, but admitted it will certainly be a factor weighing down profitability come the end of an already "challenging" 2011.

Share markets also shook with the added gravity of the North African/Middle East political unrest putting further pressure on fuel prices.

Air Transport Association of America Vice President and chief economist John Heimlich said carriers will be challenged by the price of fuel - their single largest expense - which this week hit its highest since 1-Oct-2008.

Annually, a USD 0.01 cent increase in a gallon costs US airlines USD175 million with a USD1 increase in a barrel to cost USD415 million.

MAS' Mr Zahruddin stated fuel prices would determine whether the carrier will increase fleet capacity by 4-10% in 2011. He said it may now be a "nominal" increase. MAS will take delivery of six new A330 aircraft from Apr-2011, as well as an A380 in 2Q2012. "The danger of this business is that you can get consumed by the short-term stuff. But we also still have to look at the medium and long-term," he said.

Indian LCCs moved on fares. SpiceJet CEO Neil Raymond Mills stated that at current prices for crude, airfares must increase to break even, noting that the cost of aviation fuel as "unsustainable". Kingfisher Airlines chairman Vijay Mallya said the carrier has already been passing on increased fuel cost to passengers. "Despite this, there has been no reduction in load factors," he said. Jet Airways has also "adjusted" its fuel surcharge.

On the flipside, Emirates - reflecting UAE carriers' plans to increase fares - said it has yet to see a drop in demand after raising its fares in response to the surge in oil, but stated the situation was a "worry".

"What does the real damage with fuel is the volatility. It's these rapid changes that make it very difficult to run the business profitably, because obviously we forward sell our capacity and then if fuel shoots up it is hard to recover that," said Emirates' senior VP commercial operations Richard Jewsburg.

As to the question of whether the B737 next generation narrowbody will be a re-engine or an all-new platform, Boeing CEO Jim Albaugh said the company was taking a "risk-averse approach" and hopes to avoid delays by not adding too much new technology to the aircraft, according to the Seattle Times. "We need to limit the risk and make sure that what we are biting off is not as much as we bit off on the B787. I don't want this airplane to be the son of B787," he said.