Record-high oil prices are threatening to ground millions of travelers who have grown accustomed to flying for fun and business during the past 30 years.
Air travel in the USA has grown at a rate five times faster than the population since 1978, when deregulation first allowed airlines to compete by setting their own prices and routes without government approval. Last year, 769 million passengers boarded U.S. airline flights.
But with today's unprecedented jet fuel prices, airline executives and aviation analysts are warning that only extreme fare increases and dramatic cutbacks in flights will enable the industry to cover a 2008 jet fuel bill the airlines' trade group projects will be 44% higher than last year's.
By this time next year, there could be as many as 20% fewer seats available if carriers respond to oil prices well above $100 a barrel by cutting as many flights as securities analysts such as JPMorgan's Jamie Baker are suggesting.
That would be like shutting down a carrier the size of American Airlines, (AMR) the world's largest, which, with its regional carriers, operates 4,000 flights daily. That alone would sharply increase demand and prices for plane tickets.
There would be fewer daily flights in cities of all sizes, fuller planes throughout the day and much more inconvenience. There would be fewer non-stop flights and longer layovers between connecting flights. And travelers who have long avoided flights at 6 a.m. or 10 p.m. might well have no other choices.
"You can't underestimate the spike in fuel prices and how it is fundamentally changing the industry," says Delta Air Lines (DAL) CEO Richard Anderson, who estimates ticket prices would have to rise 15% to 20% just to cover fuel costs.
The website Travelocity reports that fares this summer to eight popular destinations — including Boston, New York, Chicago, South Florida, Denver and Los Angeles — are up by at least 18% since last summer.
"Some leisure travelers are going to be priced out" of flights, says Tom Parsons, CEO of the travel website BestFares.com.
For many families, vacations by plane that have been within their financial reach could become an unaffordable luxury, Parsons and other travel specialists say. For entrepreneurs and small businesses, the increasing cost of travel could prohibit them from making faraway sales calls to grow their business.
Smaller markets threatened
Small and midsize cities now served mainly or entirely by 50-seat regional jets could end up with far fewer flights each day, because at today's fuel prices, even fully loaded small jets don't bring in enough money to justify the same number of flights.
"Communities won't lose air service entirely, but they will lose access to air service, because it will be more expensive," aviation consultant Michael Boyd says. The ripple effect of higher fares and air cargo rates could affect every part of the economy that depends on air service.
Resorts, hotels, cruise lines and convention destinations could suffer. Tourism, especially in states such as Florida, Nevada and Hawaii that depend on it heavily, could take a hit, damaging state economies and forcing cuts in government services.
High jet fuel prices helped prompt the April 14 merger deal between Delta and Northwest (NWA) airlines, whose marriage would produce the world's biggest carrier.
Delta and Northwest have pledged not to close any of their seven airport hubs if federal regulators approve their deal, but both already are slashing unprofitable flights.
"Travelers likely will begin seeing big changes this fall as major airlines reduce service more aggressively by dropping routes, substituting smaller planes and reducing the number of daily flights on a route.
Delta, the USA's third-biggest carrier, will get rid of up to 20 full-size jets and up to 70 small regional jets this year. It's pulling out of several cities, including: Atlantic City; Islip, Long Island; Tupelo, Miss.; and Corpus Christi, Texas.
This month, JetBlue (JBLU) will halt service between New York and Tucson. That route's current flights — one a day each way — generally are 70% full. However, at current fares and fuel prices, the flights need to be 85% full for JetBlue to break even on them, according to airline data.
Chicago-based United Airlines, (UAUA) the nation's second-biggest airline, will retire at least 30 of its oldest, least-fuel-efficient jets this year.
American, Continental (CAL) and Northwest are planning smaller cuts. However, some industry leaders and analysts say none of the announced cuts go deep enough. Some predict more cuts are coming.
More fare increases expected
Airlines have raised fares 10 times since the middle of December, and several are hinting at an 11th increase this week. More jumps in ticket prices are widely expected to follow.
Parsons says travelers on long-haul routes of more than 1,500 miles already are paying up to $260 more for a round-trip ticket than they did four months ago. The increases on some routes are even higher.
Consultant Richard Leck, founder of Bruin Consulting in Bedford, N.H., flies nearly every week from Boston or Manchester, N.H., through Chicago to San Francisco, where his client is based.
Since last fall, his airfare has jumped from $800 round trip to $1,500. That's partly because United stopped service from Chicago to Oakland, which was cheaper to fly to than San Francisco International. United also switched to small jets at Manchester; seats sell out faster.
Last week, his ticket for a non-stop flight from Boston to San Francisco cost $2,400 round trip, partly because he changed his original ticket, incurring extra charges. "I was stunned," he says. "Everyone has their limits, both individuals and corporate clients."
Driven by fare increases, revenue for U.S. carriers rose about 10% in the first three months of this year, a healthy jump in normal times. But every major U.S. carrier except Southwest Airlines (LUV) posted losses in the quarter. The cost of fuel was up 50% or more.
Even Southwest, which has reported 17 years of uninterrupted quarterly profits, lost money on flying last quarter. It reported a $34 million profit only because of its sophisticated fuel-hedging program. Through aggressive trading in oil futures contracts, Southwest was able to knock $302 million off what it would have paid had it bought all its fuel at current market prices.
Expansion plans curbed
Southwest, which has been aggressively expanding at U.S. airports for 35 years, will not grow in the second half of this year. Nor will Orlando-based discounter AirTran, which had been growing at double-digit annual rates since 2002.
Such are the tough decisions airlines are making this year, while they still have billions of dollars in cash on hand.
By 2009, if the price of jet fuel doesn't abate and airlines can't raise prices enough, even carriers with big bank accounts could start running short of cash and find it difficult to borrow. "There are going to be more airline failures in this environment, and they could be liquidations," says Delta Chief Financial Officer Edward Bastian.
Oil industry analysts say it could be years before new oil supplies can be tapped, new refineries built or alternatives to petroleum-based fuel developed and produced in enough quantities to fuel the airlines, which launch 30,000 flights a day. A wide-body jet gulps 30,000 gallons or more at every fill-up.
Texas oil billionaire T. Boone Pickens, who thought last year's run-up in oil prices would fade, has reversed course. BP Capital Management, Pickens' energy-oriented hedge fund, is investing based on his belief that prices will rise to $125 a barrel soon, then move past $150.
This week, the head of OPEC, Algerian oil minister Chakib Khelil, told reporters that oil likely is headed to $200 a barrel and there's nothing the cartel can do to stop it. He said forces other than the amount of crude oil pumped out of the ground are driving up prices.
Even if they were to drop an unlikely 30%, average prices would remain historically high. And there's little chance they would fall much, because of the relentless demand from China, India and other fast-growing economies.
For decades, "Air travel has been one of the incredible bargains for U.S. consumers," says Tom Horton, American Airlines' chief financial officer. "We're now in a world where airfares are going to have to reflect the cost of the product."
PanAm330 From United States of America, joined Mar 2004, 2720 posts, RR: 8
Reply 1, posted (7 years 5 months 1 week 5 days 19 hours ago) and read 4316 times:
The last few sentences pretty much nail it on the head. Yes, it's fantastic that air travel has become so mainstream and affordable (which IMO it should be, and it's essential for a healthy economy). But it shouldn't be dirt cheap. Prices need to reflect labor and fuel costs, and everything else that goes into the insanely complicated airline industry. We shouldn't be seeing any $39 fares, or $99 transcons. Those obviously aren't sustainable right now, and probably weren't even when oil was $40 a barrel. Prices need to go up to reflect costs - just like everything else. Take a look at food prices lately. Some items have more than doubled in price. We need airlines to shove it to the cheap consumer, and raise their ticket prices to sustainable levels.
Lono From United States of America, joined Apr 2004, 1345 posts, RR: 1
Reply 2, posted (7 years 5 months 1 week 5 days 18 hours ago) and read 4261 times:
I think this current oil issue will cause the demise of many airline careers..... or at least create a new demographic of airline workers... where $9 an hour is all that can be expected... sad days ahead I fear...
EXAAUADL From , joined Dec 1969, posts, RR:
Reply 4, posted (7 years 5 months 1 week 5 days 9 hours ago) and read 4070 times:
Quoting LAXDESI (Thread starter): That would be like shutting down a carrier the size of American Airlines, (AMR) the world's largest, which, with its regional carriers, operates 4,000 flights daily. That alone would sharply increase demand and prices for plane tickets.
God, that's awful economics/journalism etc.....it is reducing supply, has nothing to do with changes in demand. Moving along hte supply curve, will however be a change in quanitity demanded, but it certainly wont increase.
Quoting LAXDESI (Thread starter): Delta and Northwest have pledged not to close any of their seven airport hubs if federal regulators approve their deal, but both already are slashing unprofitable flights.
LAXDESI From United States of America, joined May 2005, 5086 posts, RR: 47
Reply 5, posted (7 years 5 months 1 week 5 days 8 hours ago) and read 4014 times:
Quoting PanAm330 (Reply 1): We shouldn't be seeing any $39 fares, or $99 transcons. Those obviously aren't sustainable right now, and probably weren't even when oil was $40 a barrel. Prices need to go up to reflect costs - just like everything else.
$99 transcon fares are usually for a limited number of seats; better $99 than flying with an empty seat.
Surely if prices don't keep up with costs, some of the airlines will burn up all of their cash on hand soon. As the article points out, most of the airlines are planning to drop some routes, cut frequency and use more fuel efficient aircrafts. All of this should help relieve congestion and make flying a more pleasant experience.
Quoting LAXDESI (Thread starter): Air travel in the USA has grown at a rate five times faster than the population since 1978, when deregulation first allowed airlines to compete by setting their own prices and routes without government approval. Last year, 769 million passengers boarded U.S. airline flights.
That is a noteworthy growth. If high fuel prices persist, there will be a permanent shift of the supply curve--resulting in a new equilibrium with much lower no. of passengers and higher prices. The current airline failures, mergers, and grounding of planes are inevitable response to this shift in supply curve.
Aerofan From United States of America, joined Aug 2004, 1536 posts, RR: 2
Reply 6, posted (7 years 5 months 1 week 5 days 8 hours ago) and read 3983 times:
I know this is an aviation forum, but aren't we forgetting that the high price of fuel will affect us all in every day aspect of our lives. Aviation is by no means the only thing that will be affected. Hmmmmmmmm I wonder if with fewer people travelling hotels will now offer better discounts to airline staff
Bmacleod From Canada, joined Aug 2001, 2671 posts, RR: 0
Reply 7, posted (7 years 5 months 1 week 5 days 6 hours ago) and read 3876 times:
Consolidation seems to be the main impact of $100+ crude. DL and NW combining and probably UA and US will enable them to better reorganize for fuel costs.
As far as predictions that air travel will cease due to high oil, they're forgetting the new fuel technologies that are being developed. New engines will consume less oil and synthetic fuels and other developments will ensure air travel survives until space travel becomes commonplace.
Yes it will take time for these developments to be completed; we just have to grin and bear the current realities until then.
The engine is the heart of an airplane, but the pilot is its soul.
Imapilotaz From , joined Dec 1969, posts, RR:
Reply 8, posted (7 years 5 months 1 week 5 days 4 hours ago) and read 3769 times:
Quoting Bmacleod (Reply 7): Consolidation seems to be the main impact of $100+ crude. DL and NW combining and probably UA and US will enable them to better reorganize for fuel costs.
How does it help them better reorganize for fuel costs? The very small amount of overhead at the corporate office in Eagen is what will be saved. The whole point of a merger is to see synargies, which if you dont take advantage of them and remove flying, is completely worthless. DL/NW have to remove a hub or 2, plus flights to existing hubs to benefit at all. Otherwise, you'll just combine the losses of 2 individual carriers into one carrier.
AirNZ From , joined Dec 1969, posts, RR:
Reply 9, posted (7 years 5 months 1 week 5 days 4 hours ago) and read 3743 times:
Quoting PanAm330 (Reply 1): We need airlines to shove it to the cheap consumer, and raise their ticket prices to sustainable levels.
No, airlines need to 'shove it' to all pax.......of course, the many on here who don't actually pay for their own travel will be horrified at the thought of their clients booking them into 'mere economy' with the minnows.