Published: July 20, 2006

As High As The Sky

Three months ago, I predicted airlines would feel the first pinch of peak oil. They’re pinched and passengers are screaming. My ears are full of complaints from friends who’ve been traveling in the past month. I’ve got to fly in 10 days; I’m not looking forward to it.

The price of oil is creeping toward 80 bucks a barrel, the price of air travel is rising to similar heights. Higher costs mean fewer people making opportunistic trips and the airlines are consolidating flights. If they once had four flights per day between two cities, they may now have two. If you’re on the second flight and you miss a connection, you’ll spend an extra night away from home. Maybe you can book a last-minute seat on another airline or route yourself through a third city and still get where you’re going tonight, but don’t count on it.

The St. Paul Pioneer Press ran an article Sunday on the effect of the price of oil on airlines. Martin Moylan wrote that fuel costs are now the highest single expense for airlines, higher than insurance, higher than labor costs and unlike the other two, no standard of performance or negotiation will bring the cost of fuel down.

Mr. Moylan reports fares were up 11 percent in the first five months of 2006, as compared to the same period in 2005 – but fuel costs were up 30 percent. Airlines based in the U.S. spent $24 billion on fuel in 2004, $33 billion in 2005 and are expected to spend $38 billion this year. A document released by Northwest airlines said the company budgeted fuel costs based on a prediction of oil at $65/barrel for 2006 and $60/barrel in 2007. Good luck with that.

It costs $101,000 to purchase the fuel for a Boeing 747-400’s trip from the Twin Cities to Tokyo. Bad news for the airlines, but for now, good news for the airplane industry. The high cost of fuel means it makes sense for airlines to replace old, inefficient planes with new models. Even at that, the fleets of the six major U.S. carriers have shrunk by 750 jets. The routes those planes flew have either been canceled or consolidated and 167,000 jobs have been cut in the process.

Other efficiencies have been found. Planes no longer carry excess water or fuel. Since meals are no longer served on many routes, ovens have been pulled from galleys to lighten the load. Frontier Airline now offers passengers cups, rather than cans, of soda, so fewer cans (and less weight) can be laded on board. Every 25 pounds of weight reduced saves the airline $200,000 each year, at the going rate.

Airlines carried more passengers and more cargo in 2005 than they did in 2000 and they did it with 400 million fewer gallons of fuel. But there’s a limit; conservation will only buy the airlines so much breathing room.

Another tactic some airlines – Southwest in particular – are trying is to “hedge” their fuel costs by locking in prices through advance contracts with fuel dealers. This can be dangerous for an airline if it locks in a certain price for fuel and the price drops before the airline takes delivery. That particular hazard has not materialized in the last two years or so, but to make future purchases, airlines need to have a healthy supply of cash on hand, which most airlines other than Southwest don’t have.

Mr. Moylan’s article appeared in the hometown paper of Northwest Airlines, so he politely didn’t mention something that appears in other articles on the airline industry. Northwest and Delta Airlines are expected to be forced into bankruptcy soon unless the price of oil drops.

It won’t, so expect bankruptcies and mergers between airlines, which will mean fewer flights and more expensive seats. The worst part is that when the airlines fail, we have no adequate ground-based mass transit to replace them.