[JohnDenver]

Lots of U.S. airlines are in trouble these days, and here at peakoil.com, the favored explanation is that they are being killed by fuel costs, driven by peak oil.

But if that's true, why are many of the world's airlines still profitable?

$this->bbcode_second_pass_quote('', 'L')ufthansa flies back to profit
Lufthansa returns to profit after huge losses in 2003
German airline Lufthansa has returned to profit in 2004 after posting huge losses in 2003.

In a preliminary report, the airline announced net profits of 400m euros ($527.61m; £274.73m), compared with a loss of 984m euros in 2003.

Operating profits were at 380m euros, ten times more than in 2003.

[JohnDenver]

Qantas is another airline which appears to be unfazed by fuel costs:

$this->bbcode_second_pass_quote('', 'R')esults for the half year ended 31 December 2004
Highlights
* Profit before tax of A$601.3 million
* Profit after tax of A$458.4 million
* Revenue of A$6.4 billion
* Fully franked dividend of 10 cents per share
* Earnings of 24.7 cents per share

[trespam]

The airlines already had problems before energy prices started going up. I wouldn't say that their problems are caused by peak oil nor necessarily a sign of peak oil. They've failed before, just as the auto manufacturers have failed before.

As energy prices continue to increase in the coming years (I think they will), more airlines will go bankrupt and the remaining ones will simply raise their prices.

I think you are right though: deregulation has killed a lot of the existing airlines. Deregulation is very difficult for capital intensive businesses. Hence the lack of oil refining capabilities, power generators here in California, and related big ticket items. And the reason for the over-taxed power grid.

[smiley]

$this->bbcode_second_pass_quote('', 'I')f peak oil is killing the airlines, why are the effects so severe on U.S. airlines in particular? Shouldn't it be killing all the airlines indiscriminately?

[Theo]

Yeah, I agree with Smiley here. I know Southwest buys oil futures years in advance in case of price spikes. In the long run though they'll have to cope with the higher prices and that's when ticket prices will go up.

[marko]

As fuel prices rise, air ticket prices will rise to the point where only the rich will be able to afford to fly. Mass-market air travel will disappear. Most airlines will go bankrupt. Schedules will be cut. Service will be dropped to small cities. Eventually, the only remaining scheduled service will be for long runs connecting the biggest or most economically important cities: London, New York, Tokyo, Shanghai, Mumbai, maybe Paris and Frankurt, maybe Dubai, maybe LAX, maybe a twice-weekly Sydney-Mumbai shuttle. Finally even those runs will go, and only those who can afford private jets will fly.

[johnmarkos]

US discount carriers JetBlue and Southwest Airlines are still profitable.

[WebHubbleTelescope]

As an eye-opener, I have likely used more petrol via airliners than through cars I have used for commuting.

My data here:
http://mobjectivist.blogspot.com/2005/03/statshot.html

I'd be curious to know if anyone else can corroborate this data against their own experiences.

[larrydallas]

I worked in the industry for a major airline in freight and baggage resolution, tracking, and claims for about 4 years.

What you have to realize is that it is not only fule prices but the lack of customers which is the problem. Peak oil hits this industry indirectly because it hits just about everyone who is a candidate to fly by increasing their energy costs and taking a bigger bite out of their budget for travel, vacations, etc. Also, the aggregate unemployment we have seen in the past 4-6 years has played a big role in lower #s of people flying and the frequency with which they fly.

When I started that job in 2000 you would not belive the kinds of mad money that was being pumped into the industry. There seemed to be no end to it. Upper management got year end bonus checks worth more than my house. Even the baggage handlers were all smiles because they were being well taken care of.

The dark days were 01-03ish. Volume was very low and people with 20-30 years of tenure were getting their hours cut, their benefits eliminated, and each day there would be a contest to see who would be asked to take a few weeks of unpaid holiday because biz was so bad.

A guy I worked with there and I tried to land a contract for a service which the airlines needed back in mid 04. I had already decided to quit that job becasue I did not want to get laid off. We were pretty close to getting the contract but did not because of political BS which I'd rather not go into.

My famliy was thrilled about it and how I was going to have an own business as I was but my plan was always to get in, make as much as I could, and get out with some other plan once I found something else which was not as risky. I envisioned about 4-5 years of this job had I gotten the green light. My folks thought it would be a lifetime thing even though I have mentioned PO to them and explained the basic principle of the thing.

I wish we had been able to get that job but in a way I sort of feel it was for the best because with oil prices, govt. deficit, and disposable income of individuals the way it is we might have gone belly up. The job completely depended on volume of passengers as a direct correlation to our take.

Anyway, I think the future of the airline industry is dark simply because the passengers are not tthere anymore as they were in the late 90s. All of the airlines have the logistics and setup to handle a customer base which is made up of a large %tile of people who would not normally fly but have a few extra $$$ so they do.

That base is ever shrinking if not gone already.

I saw somewhere that British Airways is doing some US to London round trip coach for $135 each way. I guess they just can't afford to have empty seats anymore.

I predict all but a handful of them will shut down. The ones that remain will stop this artifical low price war game and charge people what it really costs to fly. To go from the NE USA to England in a Boeing 777 uses about $120,000 worth of fuel is what a pilot once told me back in 04. I dunno how many a 777 seats but I'd guess 280-350 people.

Factor in insurance, security, maintenance, payroll, food, misc.... and I would guess to cross the Atlantic costs about $180K-$200K.

And they only want $135?

It's gotta stop sooner or later.

[jato]

$this->bbcode_second_pass_quote('', 'P')eak oil hits this industry indirectly because it hits just about everyone who is a candidate to fly by increasing their energy costs and taking a bigger bite out of their budget for travel, vacations, etc. Also, the aggregate unemployment we have seen in the past 4-6 years has played a big role in lower #s of people flying and the frequency with which they fly.

[savethehumans]

$this->bbcode_second_pass_quote('', 'Y')eah, I agree with Smiley here. I know Southwest buys oil futures years in advance in case of price spikes. In the long run though they'll have to cope with the higher prices and that's when ticket prices will go up.

[Malthus]

In the US - excessive competition + high oil prices

In the world the oil price has not increased as much as in the US due to the fall of the $.

[smiley]

Interesting insight Larrydallas. I guess that is a problem with many industries today. Globalization and liberalization has led to a cut-throat competition in many fields.

I've heard of a number of industries which cannot afford to transfer higher material costs because they are too afraid to loose customers. Instead they are cutting costs wherever they can, running up debts, and praying that it won't last long.

That is certainly the case for the airline industry, but also for the car industry. GM is selling cars at a loss. Last year they were even giving surplus production away for free just to make the volume.

On the surface everything seemed fine because they still were compensating their losses on cars via their financial services, however with rising interest rates I guess that will not go on forever. Investors seem to have realized that last week as their stock plunged by 15%.

I think after the airline industry the car sector is the next one to feel the brunt. It amazes me how some people still seem to be convinced that $50+ oil does not bite into the economy.

[Wildwell]

What prices do people think it will really start to bite in spectacular way?

$75 major problems, $100 game over?

[smiley]

$80 oil (inflation adjusted) marked the height of the oil shock, but not the start. In 1974 the oil price was the same as now, inflation adjusted. It led to a recession back then and I suppose it is going to do the same now. I don't buy the "economy is less dependent on oil" argument.

It is going to take some time to manifest itself, but I think a recession at this moment is unavoidable if the prices stay at $55.

Companies post record profits at the moment, but on closer inspection it seems that more often than not these profits are the result of extensive cost cutting programs. At a certain point they cannot fire or outsource anymore people or close more factories. If I look around it seems that every company is reorganizing, and every consumer is cutting back on costs.

Saving rates are plunging and jobless rates are rising. This means that we're slowly cannibalizing our reserves. We had a couple of good years so we have a good deal of fat to lean on, but when it is gone it is gone.

If prices like this persist, I expect the US economy to head into a recession at the end of this year, and the world to follow closely after.