Disaster for Airlines: Oil Prices

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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).

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.

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.

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