Ask the pilot

With oil prices soaring, airlines are struggling as never before. What's in store for fliers?

By Patrick Smith

Read more: Technology & Business, Flying, Airlines, Business, P. Smith, Ask the Pilot, Peak Oil

May 16, 2008 | These days you can't crack open a newspaper or click to a Web site without stumbling across one or more front-page stories about the airlines. Bankruptcies, safety scandals, fuel woes, you name it. And if there's a common thread in this media barrage, it's that none of the stories are positive. For carriers the future looks uncertain at best, nightmarish at worst.

Everybody knows the airline business is cyclical. The boom-bust cycle has been playing out since before deregulation. What's different, this time, is how potentially devastating this latest scorching might be, and how quickly it followed on the heels of the post-Sept. 11 industry wipeout. The recovery period was brief, to say the least.

The culprit, obviously, is the price of petroleum. Jim May, president of the Air Transport Association, says that soaring fuel prices are "the worst economic shock since 9/11, and, possibly, one that is worse." The cost of aviation kerosene, i.e., jet fuel, has gone up 70 percent in the past year alone. A week ago oil hit $125 a barrel, and in some corners of the globe a gallon of Jet-A is selling for upward of $6. Five years ago, the average cost per gallon was less than 86 cents. Ten years ago, it was 51 cents. I remember analysts sucking their teeth when the price topped a dollar. Such anxiety seems quaint. In an ATA press release, Dave Emerson, head of the Bain & Co. airline consulting firm, said, "The reality is that there's no U.S. airline that has a sustainable business model if $117-a-barrel oil prices endure." That was $8 per gallon ago, with no end in sight.

According to the International Air Transport Association, the past year's increases have already impacted the world's airlines to the tune of $65 billion. How bad will it get? Nobody knows. There are those who believe that oil will eventually stabilize and begin a backward slide. Considering supply and demand, the fuel-thirsty economies of India and China, etc., I am not one of those people. There's a fair chance that oil will climb past $200 a barrel, at which point the airlines will face massive realignment and consolidation. Google "peak oil" and behold the Armageddon some expect.

Fuel makes up the biggest piece of an airline's cost pie -- a bigger cut than labor, aircraft leases or anything else. On a long-haul flight, a wide-body jet might burn through 30,000 gallons of the stuff. (For more on fuel specs, try this old column.)

As discussed here in the past, weaning commercial aviation away from fossil fuels will be a long and challenging process, if it happens at all. Airplanes, unlike cars, are already extremely efficient; nonetheless, considering what's at stake for the airlines, aviation would seem to be in the perfect position to become a vanguard of new energy technologies. Alas, the ambitions of Richard Branson notwithstanding, there are few serious efforts under way.

What this all means for industry employees is pretty straightforward: mergers, job losses, pay cuts. What it means for travelers is harder to say. At a minimum, people will be paying more to fly. Airline profit margins are razor thin. With employee wages and benefits long ago gutted, there is little choice but to pass added costs along to fliers. Fares have been climbing and, as far as anybody can tell, will continue to do so.

In the past, the industry's troubles were often a windfall for fliers. That fares remained cheap for so long is one of the great ironies of the 2001-04 Airline Apocalypse. Even with the bankruptcies of five major carriers (United, Delta, Northwest and two filings by US Airways), pressure from low-cost competitors like JetBlue and Southwest kept prices ridiculously low. Fliers were paying roughly the same price for airline tickets as they were paying in the early 1980s. As late as 2006, the average fare was 15 percent cheaper than it had been in 2000, despite a 150 percent rise in fuel costs. If the most recent spikes feel especially painful, that's mostly because fares have been underpriced for so long. Heck, how many people realize that in 1950 it cost the equivalent of $5,000 to fly between New York and Europe? I wouldn't quite say there's a sense of entitlement among travelers, but it's something like that. (Before the hate mail starts, I understand that rising fares are only a part of what piss people off. More than anything, it's shoddy service that passengers resent -- a point I've sympathized with and explored ad nauseam in this column.)

And although things will probably get worse, barring any true peak oil nightmare it won't be the end of air travel as we know it. Look at it this way:

In the United States, a round-trip domestic journey of four hours' duration will consume somewhere around 3,000 gallons of jet fuel. The typical airplane on that route has about 160 seats and, using industry-average load factors, will be about 80 percent full. Thus each passenger is responsible for 23 gallons, give or take a few. Should the price of a gallon shoot up another full dollar, that's a modest, $23 increase per passenger. Running the same formula on a trip between London and New York, we end up with about 220 passengers each responsible for 135 gallons. So that dollar-per-gallon rise sticks another $135 onto your fare. Substantial, but not crushing.

In practice this is not the way airlines calculate price hikes. Every market is different, with its own set of variables. But this gives you some idea. The point where people cease flying en masse has less to do with airfares themselves than with the costs of everything else. An extra $50 or $100 for an airplane ticket is, by itself, affordable to most. But in the context of a receding economy, disposable income plummets and purchases in general, both personal and commercial, taper off. That once-a-year vacation is postponed; that conference is canceled.

Already fewer people are flying, and airlines have begun trimming unprofitable routes and mothballing planes. Cuts of up to 10 percent of systemwide capacity are likely. That's a lot, but the media has been hyping these reductions with various inflammatory headlines: "Airlines to slash flights" and the like. Again some perspective is helpful. As it stands right now, virtually any two cities in America are linked with, at most, a one-stop connection. Routings that in decades past required multiple stopovers are now flown in a fraction of the time. Internationally, transoceanic routes have fragmented, allowing people to fly directly from smaller hubs in the U.S. to points in Europe, Asia and Latin America. Even with serious capacity reductions this is unlikely to change. As an added bonus, fewer flights means less congestion -- if marginally so. (The summer rush is coming, and if last year was any indication, airport delays will be a hot topic over the next three months.)

Meanwhile, airlines are resorting to what's known as "unbundling" as a means of recouping lost revenue. That is, ticket prices are going a la carte: $10 for extra legroom, a fiver for a window seat, $25 for a second piece of luggage. Would you believe $20 for a take-home fleece blanket and hypoallergenic pillow? It's happening.

This concept isn't exactly new. Air Canada, the master of unbundling, has been doing it for some time, and Northwest began charging extra for the choicest economy seats two years ago. And as we know, the traditional airline meal is all but a relic of the past. That old beef-or-chicken entree is now a $6 sandwich wrap.

Unbundling can leave passengers feeling nickel-and-dimed, but it's a smart idea in that those looking for perks can have them, absorbing a higher share of increased fares.

How far can unbundling go, and have airlines crossed the line when it comes to generating revenue? It's a slippery slope. Air Canada charges up to $35 for a special, toll-free customer service hot line for use during delays or cancellations. The fee promises customers a quick connection to an agent who can assist with revised bookings, arrange for hotel rooms, etc. OK, but are these not "perks" that ought to be guaranteed at any fare?

I've heard all the wisecracks -- $25 for a seat belt, installation of pay toilets, and so on. I once joked that airlines would soon be selling advertising space on their overhead bins and tray tables. A couple of weeks ago, I folded down the tray table on board a US Airways flight, and discovered a cellphone ad staring me in the face. Call me a romantic, but perhaps airlines wouldn't have so much trouble selling tickets if they weren't so willing to sell their souls.