Winging It: Airlines’ forecasts go beyond fuel costs Posted on August 26th
It’s easy to be confused these days about what fluctuating oil prices mean for the airline industry and its customers. I know I’m among those wondering what’s going on.
The fuel needed to keep airplanes flying costs roughly four times what it did a couple of years ago. From perhaps 15 percent of operating costs a year or two ago, filling the tanks now slurps up as much as 40 percent of most airlines’ revenue.
But in the last five weeks or so, crude oil prices have slumped from a peak of $147 a barrel to the $120 range, bringing relief at the pump to motorists, truckers and businesses of all sorts.
Airline analysts have been tossing their hats in the air amid predictions that unless oil shoots up even higher than its July peak, and stays there, some carriers could make money in 2009.
That’s much different from the grim outlook of a few months ago, when several airlines seemed to be headed straight downhill, toward Chapter 11 or even liquidation. The reasons for analysts’ optimism go beyond just falling fuel costs.
As Jamie Baker and Mark Streeter of JP Morgan said in an Aug. 12 report: “This isn’t the same industry that gave us pause last March.” Also crucial to the airlines’ better prospects, they and other analysts say, are higher fares, the imposition of new “a la carte” service fees, and cutting capacity by eliminating service and retiring older, gas-guzzling planes, all of which has contributed to much-improved liquidity.
Baker and Streeter say that the seven “legacy carriers” that predate deregulation in 1978 - Alaska, American, Continental, Delta, Northwest, United and US Airways - could wind up next year with more than $20 billion in liquidity, mostly cash, compared with predictions of just over $12 billion in late spring.
Among the efforts the airlines have made to stabilize their finances, US Airways was credited with helping itself with a public stock offering that generated $179 million in cash. At the end of last week, analysts were pleased, too, by a higher-than-expected increase in July in industrywide passenger revenue per available seat mile. That’s the fundamental measure of how fare increases and the new fees, combined with capacity cuts, are affecting the carriers’ bottom lines.
To the airlines’ retail customers like you and me, of course, more revenue for them means higher fares and fewer flight options for us. As airlines continue to tweak their schedules, watch for more moves like United’s decision to stop flying nonstop between Philadelphia and Los Angeles in December. Don’t be surprised if US Airways’ fares on that route next year reflect the reduction in competition.
All of this causes tangled emotions. The airlines need more revenue to survive soaring fuel costs. When we’re still paying more than $3.50 a gallon to fill our personal gas tanks, we can sympathize with their plight. But it’s hard for a business traveler to avoid feeling gouged when work demands a trip to Boston with just a few days’ notice, and using nonstop flights both ways costs more than $1,000.
I guess I’m not confused about where this is all headed. Agreement is widespread that worldwide demand for oil is going to continue to push up prices. What we thought a year ago would be outrageously high costs are the new norm, and we’re all forced to adjust to it.
It should be no surprise that energy policy, and how we’re going to find alternative sources of energy to replace petroleum, may emerge as the most important issue in this fall’s presidential election.
Rediscovering trains
Speaking of trying to go to Boston and back at a reasonable cost, has anyone noticed what Amtrak has been experiencing lately? The railroad set a record for passengers carried in July of 2,750,278, 14 percent ahead of the same month in 2007. The increase in customers is about the same since the start of the federal fiscal year on Oct. 1, compared with the previous 10-month period.
Individual Amtrak routes, like the New York-Philadelphia-Harrisburg Keystone Service, and its corridors in California, also are breaking records for passengers and revenue.
The reasons for the surge in business are clear and logical, according to a statement by Amtrak president Alex Kummant: Increasing fuel prices, highway congestion, airline issues and environmental awareness. To me, “airline issues” translate into both the hassle factor and the cost. A round trip on the train between Philadelphia and Boston, buying a ticket today for travel tomorrow, will run you between $228 and $400.
Here’s hoping that this kind of result for Amtrak will continue to boost the support it has received this year from Congress. And perhaps the results will also quiet that vocal minority, in government and elsewhere, who think passenger trains are oh-so 19th century.
Contact Tom Belden at 215-854-2454 or tbelden@phillynews.com