katanapilot
Posts: 157
Joined: Fri Oct 01, 2004 2:25 pm

Is Jet Fuel The Nail In The Coffin?

Fri Oct 01, 2004 2:42 pm

I read a recent news article stating that 26% of CI's operating costs is the purchase of jet fuel. This is an enormous percentage, but i'm not surprised in this day and age. Is jet fuel an airlines largest operating cost?

If jet fuel prices went down, could airlines like US Airways and Air Canada survive, or are there other factors?
 
BlueF9A320
Posts: 35
Joined: Fri Oct 01, 2004 3:32 pm

RE: Is Jet Fuel The Nail In The Coffin?

Fri Oct 01, 2004 3:54 pm

Katanapilot,

Generally, labour comprises most of an airlines cost, it being about 40% of total costs. Hopefully this helps.

v/r

Chris
Audentes Fortuna Juvat...
 
spacecadet
Posts: 2793
Joined: Thu Sep 20, 2001 3:36 am

RE: Is Jet Fuel The Nail In The Coffin?

Fri Oct 01, 2004 4:18 pm

If jet fuel prices went down, could airlines like US Airways and Air Canada survive, or are there other factors?

Well, labor is a huge problem but labor's always been a huge problem. (And by "problem", I don't mean that in the absolute sense - I'm not anti-labor - I'm just talking in terms of something that needs to be actively managed and can get out of control if it isn't.)

I mean look at it this way.. airlines have failed in the 1980's, the 1990's, and the 2000's, and oil hasn't been $50 per barrel during that entire period. It's really got very little to do with jet fuel costs; that's a popular myth around here. Oil (from which jet fuel is derived, after all) is actually still cheaper than it was in the 1970's when you adjust for inflation, and airplanes are much, much more efficient than they used to be.

There are two sides to any business; the cost side and the revenue side. And it's a fallacy that you can just cut, cut, cut and all of a sudden your business is profitable. Costs are not the only issue. You could cut your expenses from $1 billion to a single dollar, but if you only take in 99 cents in revenue, you will still go out of business. It's that simple. There is a common saying in business, which is "you don't grow your business by cutting costs." Which doesn't mean that you waste money all over the place, it just means that if you're not profitable, yes you need to look at the cost side, but if everything's running as it should be then you should be looking at how to raise revenue. The point of business is to make money, not to cut costs, and growth is accomplished by getting bigger, not smaller.

Labor, fuel, overhead, I mean these are expenses that have been part of the industry forever, and will be part of the industry forever. The problem right now is revenue. Fares are too low, everybody knows it, but nobody can do anything about it (AA just tried raising fares by $5-$10 across the board, but had to lower them again because no other airline followed their lead). It's kind of a problem when you operate a business that literally cannot compensate for costs on the revenue side. I mean what happens when there's a bad wheat harvest and the costs to farmers go up? You pay more for your bread and cereal; the costs get passed on to the consumers, and the cereal makers stay in business. That's the way the system is supposed to work (like it or not). But the airline industry doesn't work that way.

The airlines all pretty much have to match whatever the lowest-priced competitor offers on any given route. Which means if you've got one airline trying to grab market share on a route, it screws that route up for everybody else. And that's almost always the pattern, with almost every route, especially during periods of upheaval in the industry like we've got going on now. The airlines smell blood and all of them are trying to position themselves to knock the other guy out while surviving themselves.

Too much supply, not enough demand, and it's probably going to get worse before it gets better. But eventually it will get better, and I expect you'll see people quit complaining about jet fuel prices, even though I have a feeling we're probably going to be stuck with $50 per barrell oil prices for a long time to come.
I'm tired of being a wanna-be league bowler. I wanna be a league bowler!
 
jc2354
Posts: 601
Joined: Sat May 01, 2004 9:56 am

RE: Is Jet Fuel The Nail In The Coffin?

Fri Oct 01, 2004 4:29 pm

Spacecadet,

Brilliant analysis!

Regards,
Jack
If not now, then when?
 
katanapilot
Posts: 157
Joined: Fri Oct 01, 2004 2:25 pm

RE: Is Jet Fuel The Nail In The Coffin?

Fri Oct 01, 2004 5:03 pm

great response! thank you.