Everybody loves statistics. In an era where we count everything, we can now come up with a baseball player’s batting average with men on second and third base during a day game on a weekday when the pitcher’s last name begins with the letter “P”. I’ve seen stats that show which airlines can make money at various oil prices, and understandably the list of profitable airlines gets shorter as the price gets higher.
One metric I haven’t seen is a graph showing a correlation between the number of U. S. domestic airlines and the price of oil. I don’t think it is quite as linear as the comparison of profitability and the price of oil. There are most likely plateaus where the inevitable decrease in capacity boosts the revenue line by allowing the remaining airlines to raise prices to offset the increasing cost. The wild card here is finding the point at which air travel becomes too expensive for the discretionary traveler, and what price the remaining customers are willing to pay.
While poking around the net I found a neat matrix put together by ATA (not the airline) that shows the average price per gallon of jet fuel and the average price per barrel of oil by year. Looking at the 10 year period 1998 – 2007 there is a very consistent correlation between what a barrel of oil costs and what a gallon of jet fuel costs. Plugging the cost per gallon of jet fuel into a simple matrix that calculates the fuel burn of a commercial jet airliner is a simple matter. Then it becomes a exercise of masochism; how bad you want to make yourself feel?
Oil at $150 a barrel means jet fuel at ~$3.60 a gallon, and that means a 737 burns up almost $3,000 an hour for fuel alone. At an 80% load factor with 130 coach seats that means almost $30 per onboard passenger goes for fuel on a one hour flight. (Check my math; [5500 LBS/hour for a 737-300 x 6.84 pounds per gallon of jet fuel = ~800 gallons/hour] x $3.60 = $2,880 / 104 passengers). Plug your own numbers in for your favorite aircraft, and adjust the fuel burn numbers for a longer average stage length if you’d like.
Using my simplistic model, outside of fares, a lot of things get smaller when oil gets that expensive; fewer short flights in a 737, fewer passengers (due both to higher fares and less service) flying on even fewer airlines, and the ATC and Airport Security problems diminish (there is a silver lining).
Play it forward – how high can the price of oil go? $150? $200? Higher? The absolute number doesn’t really matter. The price of oil will be what the buyer is willing to pay and what speculator thinks it will be worth in the future. Oil price volatility is the new “re-regulation”, forcing airlines to remove themselves from markets that don’t make economic sense and presenting a significant barrier to entry to the industry for new carriers.
Determining the shape and size of the airline business in the future is more difficult, and probably a fruitless exercise anyway. It’s Airline Darwinism, which is to say it is an evolution that requires the industry to adapt to the new world of expensive fuel. Those unable to make a profit on their basic business will burn cash until they either figure it out, run out of cash and things to sell off, or oil prices significantly reduce (in which case they remain exposed to another upturn in prices). Or, they will survive if they do nothing but have the financial stamina to hang on until the industry shrinks enough so that fares can rise to offset the new cost structure.
How much capacity will have to be pruned is a question best left to experts, of which I ain’t one. Regardless of how much capacity reduction is ‘enough’ to generate a positive revenue impact, in my view it will require more than just temporarily parking airplanes. Unfortunately the additional pain of workforce reduction is necessary in order that airlines don’t adversely affect their unit costs.
A less important but nonetheless interesting issue is the question of how ancillary revenue plays a part once fares rise. Anyone who read my post entitled “Ancillary Agida” knows my view of that issue. If fuel prices stay high, or volatile, and another 5 or 6 airlines stop flying, will the survivors continue to put lipstick on that pig? Or instead, will they raise fares $50 each way and include checked bags, advanced seat assignment, and bad airline food?