Disaster for Airlines: Oil Prices

May 14, 2008 — -- Go ahead and scoff -- but those backroom whispers about oil hitting $200 a barrel in a year or two are whispers no longer -- the idea is being shouted from the headlines. Don't believe me? Just type "$200 barrel oil" into Google, grab yourself a big cup of coffee, and watch 1.3 million references begin to pop up. Yes, oil at $200 a barrel is very likely heading our way, and if you don't believe me, ask the folks at Goldman Sachs who suggested just that.

Now, let's go back to last summer -- before the run-up in fuel prices began -- and I think you'll find most passengers, leisure and business alike, were OK with airline ticket prices; the cost of airfare was generally compatible with travelers' budgets. And it was working for the airlines, too: after years of clawing their way out of financial disaster, many carriers were finally showing signs of strength with profitable financial quarters.

But as I said, that was before the price of fuel went completely bonkers.

Now, Southwest Airlines CEO Gary Kelly says, "No airline can make money at $123 a barrel." A sobering message, considering his airline is the only large one that made any profit at all in the first quarter of this year. So, I wondered -- in this stumbling, lurching economy of ours -- what does air travel look like at $200 a barrel?

In a word, grim. I envision a combination of sharp fare jumps coupled with fewer airlines and fewer available seats, and, worst of all, maybe a return to government regulation (the word "bailout" comes to mind). Others are casting around, looking for new aviation "heroes" to rescue us from this mess (Howard Hughes, anyone?).

My prediction: it won't be pretty, it will be painful, but we can get through it. Let's take it from the top.

First of all, fuel now represents 40 percent of airline expenses; according to an industry analyst, a 3 percent daily rise in oil prices is enough to wipeout an entire year's profit. An entire year's.

Of course, this isn't really new: airlines have been folding (which fits in nicely with a 25-year-old prediction I unearthed recently, that claimed the airline industry would eventually be dominated by an oligopoly, where the few control it all).