Posted on 03/14/2005 4:15:47 AM PST by Arkie2
The prospects of oil prices dropping back below $40 per barrel now appear to be running neck and neck with Michael Jackson getting Babysitter of The Year Award.
Delta Air Lines, which up until this latest spurt in fuel prices was heading out of the financial woods, has warned that it may not have sufficient liquidity to meet its needs in 2005. Translating that: they're running out of cash. Reason: skyrocketing fuel costs are draining the airline's coffers. Fast.
Delta is just the first to sound the alarm.
OPEC has all but said that $50 or higher will be the norm. That means that anybody operating airplanes is in deep yogurt. Suddenly, all that re-structuring that carriers like Delta, American, and United have accomplished is going down the Crane Fixture of high fuel costs.
But it's more immediate than that. Fuel is now a giant vacuum sucking cash out of airlines at a frightening pace. Bankruptcies to conserve cash are now entirely possible. Unfortunately, all that'll do is buy some time on the backs of creditors, not to mention cause any future DIP funding sources to scatter for safety.
Bottom line: Any business that involves sticking a fuel nozzle into an airplane wing is a business that's in real trouble. That means no exceptions - mega-carriers, LCCs, and small jet providers are all getting hammered. So don't believe the inevitable "LCCs-are-the-future" goo that will be coming from the usual suspects in the media who don't know the difference between the Wright Amendment and the Wright Brothers. Even Southwest, still heavily hedged, certainly knows that when the fuel hedges unravel, they've got real problems to face.
Soon: Nasty Near-Term Fallout In The Airline Industry. There are some folks who, quite accurately, would point out that we've heard this all before - dire warnings about oil going to $80 bucks a barrel and higher - every time there's been some sort of crisis. When things settle out in the Middle East, they claim, normality will return. Oil prices will then drop, just as they always have. From an historical perspective, this is 100% accurate.
But, while we all hope these comments bear out, this time it's different. The Middle East isn't the long term problem driving oil prices up to Chanel No. 5 levels. The problem is the Middle Kingdom. We're talking China. We're talking about a country that will permanently be importing more and more oil, stretching global supplies. The Chinese may claim that they're just good 'ole agrarian reformers and loyal communists. But the fact is today, you'd probably be hard pressed to find anybody wearing a Mao jacket behind the wheel of all those Mercedes and BMWs stuck in Shanghai traffic.
The point is, the global demand structure for energy supplies has changed. The chances of oil dropping to anywhere near where it was in 2003 are very slim.
Selling Assets Is Short-Term. Some analysts have suggested that Delta and other carriers could sell their wholly-owned small jet providers to build cash. The problem is that ASA and Comair, for example, are dependent upon a revenue stream and a system that's fundamentally losing money. Add to that the hard reality that operating 50-seaters is not going to be a growth industry - in fact, it will be a declining industry - and buying an ASA or Comair or American Eagle only makes sense when the purchase price is really right. Like peanuts.
Fare Increases Are Partial Solutions Only. It's pretty clear that just raising fares a couple bucks isn't a panacea. It's also a fact that today, major airline flights are full - when load factors go into the mid-70% range, that means the majority of an airline's saleable product is being sold.
The fact is that the part of the airline cost pie labeled "fuel" is expanding rapidly. Other slices of the pie are going to have to shrink, big time and fast, if airlines are to survive. Labor is pretty much tapped out, at least in terms of wage rates, if not work rules. What this points to is a need for a complete re-structuring of how airlines produce their product.
One can joke about pillows and blankets, but it's a pretty sorry sight to see flight attendants happily and voluntarily trying to get passengers to accept newly-packaged blankets, when their carrier is facing a liquidity crisis. It's a sorry sight to see three or four departure agents working a single A-319 flight, when every single passenger is already ticketed and checked in before he or she arrives at the gate.
If the industry is to survive in any form vaguely as it is today, a complete re-build of the process will be required. The problem is that any such changes will take time to manifest in lower costs. Higher fuel costs, on the other hand are right-now.
This doesn't make any sense. I don't pretend to be any sort of an expert in airline regulation, but I would think that they could pass the increase due to fuel costs to the passengers.
I don't understand why a business would choose to allow itself to become bankrupt rather than raise its prices due to market conditions that are outside of its control. Everyone else can do it, why can't an airline?
World's Rich Castes to fly,.....Poor Castes to pay for them?
/evolution's re-incarnationist castes systems?
Interesting.
My nephew is a pilot with a commercial airline.
When he was in college (10 years ago), the airline industry and piloting was on the "hot jobs in the future" list. Since he already had his pilots license, he got his degree and immediately went to work for an airline.
At least he still has a job, but not the pay increases he expected.
Just shows how things can change.
There are too many airline seats chasing too few passengers. Their goofy pricing models have boxed them in but good. The government would go nuts if they all agreed to return to the old days as a group. Collusion, you know.
Some thinning of the herd over the next few years, as US Airways has had to do, will be the answer.
Rome 'fell' because of greed and colonial 'oil' prices?
I'm a commercial pilot nearing retirement and there's absolutely no way I would recommend a young man or woman enter the pilot ranks. The future is bleak in my opinion.
First They already are. Among the "taxes" that you pay on an airline ticket is a rather hefty YQ "tax" which is a fuel surcharge imposed by the airlines, not a government tax. Second, of course prices rise to cover costs of doing business. Fuel is not something that any of Delta's competitors can fly without.
But then, the environmentalists probably wouldn't let us mine the oil shale.......
Passenger price sensitivity is a big factor. There are lots of people flying who don't need to, just because it's cheap. Lots of college kids flying to resorts for spring break, etc. There are lots of people flying instead of driving moderate distances, because the price differential is worth it given the time saved -- but multiply the price increases by a family of four, and suddenly driving and spending a couple of nights in highway motels becomes worth it. And probably the biggest sensitivity of all is business flyers. More and more businesses are finding it worthwhile to invest in sophisticated videoconferencing technology. Rising air fares will accelerate this trend, and permanently reduce the demand from business flyers, who are generally paying the highest fares already.
An airline seat is a commodity. Any price increases drive passengers away. The airlines simply have no pricing power. There's an attempt to raise fares by $10 going on right now but there's doubt whether the airlines can even make that stick.
Canada has bigger oil reserves than Saudi Arabia but it's in tar sands. They are extracting it now but with China looking for supplies all over the world the price of oil isn't going down any time soon.
As for oil shale, it created huge environmental problems. Normally I don't side with the environmentalists but there's just no good way to dispose of the tailings created by oil shale extraction.
Guess I'd better spend my Skymiles.
Several good replies, thanks all. What I'm basically getting, is that Delta would rather risk bankruptcy than break out of a stupid marketing model and price its seats so that it can make money and stay aloft.
There's stupid, then there's REALLY stupid!!! This qualifies as the latter. Fiscal reality is that as long as the enviro-nazis refuse to let us drill for new domestic oil sources and build new refineries, we will ALL pay a huge price - both in the loss of jobs and higher oil prices. As long as the enviro-nazis are satisfied to let OPEC and China call the shots, we might as well get accustomed to having fewer airline choices and higher pump prices.
Stupidity begats stupidity!!
It won't be just the airlines. Highjer fuel costs will impact any manufacturing process that involves the use of energy, like steel making.
And, as I told my wife, higher food prices due to increased transport costs.
While I understand your frustration what you propose isn't feasible. It's been proven that raising ticket prices won't work. The incremental increase in revenue from people willing to accept the cost increase won't offset the loss from those folks who will simply stay home, change their travel plans or drive. Airlines have no pricing power. It's an economic reality.
(Denny Crane: "Sometimes you can only look for answers from God and failing that... and Fox News".)
Disclaimer: Opinions posted on Free Republic are those of the individual posters and do not necessarily represent the opinion of Free Republic or its management. All materials posted herein are protected by copyright law and the exemption for fair use of copyrighted works.