Disaster for Airlines: Oil Prices

And that includes controlling the prices: since January of last year, the airlines have increased prices 27 times. That's one way airlines fight for survival; the other is to cut capacity. That's happening now, too. Cities, like Pittsburgh, have lost significant service, and dozens of small cities are losing all their scheduled fall air service.

"Whoa," say some analysts, "how much capacity can be cut?" Good question, and in answer, some are saying maybe it's time to go back to the days before the Airline Deregulation Act of 1978 -- an intriguing and worrisome notion.

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Most analysts say airline deregulation was successful, but not everyone liked it at first. I was recently perusing an unintentionally humorous article from the New York Times archives, dated 1982, in which the author bemoaned the loss of amenities in the deregulated airline world: "gone are the days when minimum-rate passengers were served prime steak and complimentary champagne." Perhaps even more shocking, the author wrote that some airlines "have been experimenting with penalties for passengers who cancel bargain tickets." We can laugh now, but they weren't laughing then.

The pros and cons of deregulation? The cons are easy: airlines feared losing protected routes and prices. Smaller cities were concerned about losing service. And unions worried about losing pay and losing jobs. Much of this has happened, but the main pro in the deregulation debate also happened.

Ticket prices went down.

For example, in 1977 you would pay $86 to fly from Philadelphia to Pittsburgh; in today's money, that's about $295. But you don't pay $295 today; last week I found a fare from Philly to Pittsburgh for just $112. Great, right? But wait a minute: how can an airline survive at that price? Forget oil prices reaching $200 a barrel -- how can an airline survive such prices at the current price of oil?

Well, as noted, many are not surviving; so, the airlines are desperately adding fees ($25 to check that second bag) and they're slapping fuel surcharges onto the prices of their tickets, which has meant an additional $130 above the base ticket price for hundreds of thousands of fares. And notice that the $130 fuel surcharge is currently higher than the price of a barrel of oil.