Can airlines live with $100 oil?
By Anthony O'Connor
15 November 2007
The US air transport market appears to be one of the hardest hit by escalating fuel costs that could result in extensive capacity reduction if carriers, such as United Airlines, actually go ahead and ground aircraft if ticket price hikes passed on to the travelling public result in a fall-off in demand.
Jake Brace, United's chief financial officer (CFO), told investors recently that the airline could ground up to 100 aircraft unencumbered by finance if passenger demand slows down, leaving airlines operating aircraft with dwindling load factors.
Unlike smaller airlines with limited fleet flexibility, United has more than 100 aircraft, including 50 B-737s, that could be taken out of service should demand fall off. These aircraft would represent more than a fifth of United's mainline fleet of about 460 aircraft.
Data gathered by the US Air Transport Association (ATA) shows that in the second quarter of this year, for the first time jet fuel has become the single-highest cost component for US carriers at 25.4 per cent of all operating costs. Jet fuel even surpassed labÁour costs - traditionally the highest cost component - which accounted for 23.6 per cent of operating costs during the quarter.
The ATA's composite cost index rose to 185.7, up by 5.6 per cent from the second quarter of 2006, compared to a 2.4 per cent increase in the Consumer Price Index (CPI) in the US.
"Soaring fuel prices, among other pressures, leave little room for error in maintaining today's modest profit margins," according to John Heimlich, ATA chief economist. "With the cost of running an airline up 86 per cent since 2000, the industry remains laser-focused on improving efficiency and finding additional sources of revenue."
With the weak US dollar kept at historical lows by the US Federal Reserve's mid-September decision to cut interest rates from 5.25 per cent to 4.75 per cent, hoping to calm financial markets and protect the US economy, and the fact that interest rates remain higher in other leading economies such as the UK, investors have been investing heavily in oil and other commodities such as gold, pushing up the prices of these commodities.
Prices hit a record high above USD98 a barrel in early November after crude oil supply fears mounted following the closure of platforms pumping more than 200,000 barrels of oil a day in the North Sea due to bad weather. But prices then fell back sharply after US crude inventory figures showed a smaller than expected weekly fall. Nonetheless, the USD100 a barrel level is expected to be achieved in the coming months if not weeks, analysts conclude.