Airlines Struggling To Pay Fuel Bills

Jim Brown
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To fly you from New York to Los Angeles and back today it costs the airlines $330 per person in fuel. That is a 48% increase over May of 2010 and the single biggest expense for the airlines.

Currently jet fuel costs just over $3 per gallon and it costs 22 gallons for every 1000 passenger miles. If you booked your flight in advance and used a discount ticket your fare may actually be cheaper than what it costs the airline to fly you. Of course the airline pays the came cost for that seat whether anyone is in it or it is vacant. I have not seen too many vacant seats recently so they are successfully filling them at some rate.

Fuel accounts for 48% of an airline's expenses today compared to only 15% ten years ago. If a flight has 200 seats and only 50% are filled at a full ticket price they have to entice enough people to fill the empty seats at any price possible or they will lose money.

The U.S. passenger airline system was not meant to be a low-cost mass transit system but excess competition has turned it into one. You can hardly cruise the web for more than a few minutes without seeing an advertisement for a $59 ticket. However, only a small percentage of seats qualify for that price. The actual average price for a domestic round trip ticket in the USA this summer is expected to be $430. That includes taxes but excludes baggage fees and other services like food.

The average round trip ticket in 1978 was $650 and it included everything. No bag fees, food and beverages were served and there were plenty of flight attendants to go around. Today baggage fees, typically $50 per bag (round trip) have added more to the cost of flying than actual fare increases since 2008.

Because of the increased competition they can't raise the ticket prices so they raise the price for everything else. Although they have raised ticket prices by +10% so far in 2011.

The problem is the soaring cost of fuel. The airlines went from a profit in 2010 to losing $1 billion in the first quarter of 2011. Oil averaged about $96 in Q1. That average is going to spike to about $105 in Q2. They may not be celebrating the decline in oil prices to $100 over the last couple weeks but they should be. As summer progresses and oil demand increases the prices are going to rise.

Remember last week when Goldman Sachs, Morgan Stanley and JP Morgan raised their oil estimates to between $120-$140 over the next 12 months. If that comes to pass and I believe it will the airlines are going to be hemorrhaging cash. With an oil price at $120 per barrel there are estimates for U.S. carriers to lose up to $5 billion a quarter.

If this was a temporary spike they could get through it. Unfortunately despite volatility in oil prices they will continue to rise with $140-$150 in late 2012 if current global demand continues to grow and global production continues to increase at a snails pace.

The airline industry will grow a lot smaller over the rest of this decade. I expect to see the government takeover some airlines while others will simply go out of business. Airline travel will eventually be only for business travelers who can afford the $1000+ tickets. Mom and pop blue-collar workers will be forced to drive their car, also going to be expensive, or take a bus or train. The long distance $159 trips to see grandparents at Christmas and Easter are going to disappear.

Families should begin planning now for the lack of affordable travel in 3-5 years. Do you want to live a thousand miles from your kids? Do you want to commute 50-miles each way to work? Our lives as we knew them are about to change. This kind of generational transformation only occurs 2-3 times a century. For the U.S. we will suffer more from high oil prices than any other country because we consume 22% of the world's oil with only 4.5% of the world's population. The next oil recession could be a lasting decline and it will change our driving, eating and housing habits forever.

Jim Brown

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