Peak oil threatens the airline industry

…Then there’s fuel. In this column a week ago, in what could prove to be as gross an understatement as could have been made, fuel was deemed the “wild card” among the industry’s competitive variables. For anyone with a vested interest in the airline biz — and that includes the frequent traveler — the more one looks at the tensions and uncertainties surrounding global petroleum supplies, the more one quakes in fear. Driven partly by the high consumption rates of growing economies like those of India and China, worldwide demand is beginning to outpace worldwide supply. Should production slow beyond a certain level, as some leading analysts predict will happen soon, energy tabs could increase above and beyond anything we’ve ever seen. Google the term “peak oil” and behold what plenty of people expect will be nothing less than economic Armageddon.

Last fall, the price of a gallon of jet fuel scooted beyond $2 — twice what it was only two years earlier. Thus far in 2006, the market rate has been hovering near $1.80, with a barrel of crude going for around $60. Many experts are forecasting $100 a barrel within the next year, and one French investment bank sees costs approaching $400 per barrel within the next decade! According to one estimate, even a 2 percent shortfall in output would bring on a 20 percent rise in cost. Only a week ago, prices jumped $2 per barrel after a thwarted suicide bombing at a Saudi Arabian petroleum facility. Imagine the fallout from a major successful attack.

Apart from the consumption crunch, a slew of unstable, highly unpredictable forces are at play in some of the world’s most important oil-producing regions: fighting in Iraq, unrest in Nigeria, the dangerous posturing of Iran. A calamitous surge in prices needs only one gunshot, with several itchy fingers already scrabbling at the trigger.

Fuel bills are already dragging heretofore-successful airlines into the red. JetBlue’s fourth-quarter 2005 deficit can be blamed almost exclusively on fuel. So far, Southwest Airlines is the only major player to stay ahead of the curve, doing so through a remarkably prescient hedging program. Buying kerosene at set prices up to three years in advance has kept Southwest out of trouble (and is arguably responsible for holding down the average price of a ticket more than any other single factor). The Texans haven’t been the only airline to hedge, but they’ve had the resources and foresight to be the most successful at it. (In 2004, Delta was forced to sell off its hedge positions during a cash crunch, a move that proved disastrous once prices began to soar.) Once Southwest’s hedges begin to run out, the playing field should become much more level.

Salon.com