WE HAVE ALL BEEN HERE BEFORE By Joe Brancatelli February 22, 2012 -- Here's something you already know: The surging price of crude oil is once again causing us real pain at the pump. Gasoline prices were higher last month than any January on record. and everyone in the prediction business says the outlook is grim for spring and summer prices. Here's something you probably need to be reminded about: Surging oil prices will cause you real pain at the airport too, because airlines are disproportionately affected by energy prices. They'll raise fares on business travelers, and you'll stop flying because prices have gotten too high. Then they'll drop routes that are no longer profitable and mount counterintuitive fare sales in a desperate bid to lure discretionary travelers back onto the planes. Some airlines will die. Here's something I'll tell you now because you'll probably remember it yourself before the end of this column: It's déjà vu all over again. We've lived what we're about to live before. It was called 2008. It wasn't fun. And it'll probably be worse this time. Let's start at the metaphoric top line and the real-world gas pump, shall we? With crude oil prices nearing nine-month highs, selling for about $105 a barrel on New York markets on Tuesday morning, gasoline has surged to what the AAA says is a national average of $3.57, up from $3.17 a year ago. We've already hit the $4 plateau in some parts of the nation. Given the tensions with Iran, the "experts" that predict $5-a-gallon gas by summer don't look all that wild-eyed. The airlines, which spend at least 35 percent of their operating budgets on energy costs, actually have it worse. They paid an average of $3 a gallon for jet fuel in 2011, the highest average annual price in history and a 30 percent year-over-year increase. Jet-fuel prices in 2012 are already averaging $3.12 a gallon. Last Friday, it sold for $3.20 a gallon, according to a spokesman for Airlines for America, the industry trade group. Spiking fuel costs have already contracted the size of the U.S. aviation system. The Department of Transportation says airlines operated just 6.08 million domestic departures in 2011, the lowest number in a decade. In fact, departures have fallen every year since 2008, when crude-oil prices spiked at $147 a barrel in the spring and the economy melted down in the fall. Want an even longer view? Back in 1990, the Federal Aviation Administration predicted that the airlines would board nearly 815 million passengers by 2001. We've never come close to that number, and last year the passenger count was below 800 million. Want still more? Two airlines, Spanair of Spain and Malev of Hungary, have already folded this year after their government backers decided to stop throwing good money after high oil prices. And Air Australia collapsed last Friday, grounded its flights, and abandoned about 4,000 travelers around the Pacific. According to the administrators called in to salvage the remains, Air Australia stopped operating because it couldn't afford to buy the fuel needed to fly its planes and passengers back to Australia. Want the hit-me-in-the-pocketbook reality? After about a dozen fare increases last year, U.S. carriers have already imposed two more across-the-board price hikes this year. Most ominously, last week's $10 roundtrip fare bump initiated by Southwest Airlines, which has recorded profit for 39 consecutive years. Southwest generally operates as a governor on fares and usually opposes price hikes initiated by its legacy-carrier competitors such as United and Delta. When Southwest is leading the fare charge, however, you know that we're in for higher prices. So right about now you should be getting that déjà vu all over again feeling. And you're right. This is exactly what happened in 2008. As crude-oil prices jumped, airlines frantically raised fares to keep pace. (Airline pricing behavior this year "eerily resembles Q1 2008," observes FareCompare.com chief executive Rick Seaney.) But high energy prices nationwide suppressed the economy at large, which depressed the demand for business travel. And many business flyers who weren't put off by the deteriorating economy chose to defer travel anyway because they thought fares were too high. Faced with falling demand and higher jet-fuel prices, airlines ended up doing three things more in 2008: They went out of business (four in one week in early spring). They cut their least profitable (or biggest loss-making) routes. Then, faced with planes that remained empty, they started cutting fares for leisure flyers in a desperate attempt to get some revenue coming into the system. Some of the so-called experts insist that the airlines are better prepared for this year's crisis than they were in 2008. They note that, save for American Airlines, which declared Chapter 11 bankruptcy last fall, the airline industry at large is modestly profitable. They add that there are fewer competitors left to divide the diminishing pie. And they are convinced that the industry has cut its other costs so far and reduced its route maps so dramatically that the carriers are as lean and mean as possible. But that's what they said in 2008, when the oil-price surge wiped out the nascent all-business-class airline segment, grounded discount airline startups, and even washed away some well-regarded regional players like Hawaii's beloved Aloha Airlines. What always confounds the experts is how quickly both business and leisure flyers will stop flying when the economy softens, fares appear unreasonable, and surging gasoline prices sour everyone's mood and empties our pocketbooks. All that's left now is to watch fuel prices rise, airline raise fares, cut routes, begin to fold, and then start discounting like crazy again. Oh, and plan for the worst by exploring tips and strategies for keeping sane in a world gone mad over oil prices. Wait, I did that, too. Things got so crazy in 2008 that I wrote two survival columns. You can read them here and here. Like I said, déjà vu all over again. The Fine Print…The winter of Europe's airline discontent, which we discussed earlier this month, is only getting worse. A pilots strike against Iberia grounded hundreds of flights on Monday, and new one-day strikes are planned for Friday, February 24, and Wednesday, February 29. Meanwhile, ground workers at Frankfurt Airport extended their strike this week after the airport authority rejected a proposal by an outside mediator. Upwards of 30 percent of Frankfurt's daily flight schedule has been canceled. |
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ABOUT JOE BRANCATELLI Joe Brancatelli is a publication consultant, which means that he helps media companies start, fix and reposition newspapers, magazines and Web sites. He's also the former executive editor of Frequent Flyer and has been a consultant to or columnist for more business-travel and leisure-travel publishing operations than he can remember. He started his career as a business journalist and created JoeSentMe in the dark days after 9/11 while he was stranded in a hotel room in San Francisco. He lives on the Hudson River in the tourist town of Cold Spring. THE FINE PRINT This column is Copyright © 2012 American City Business Journals. All rights reserved. Reprinted with permission. JoeSentMe.com is Copyright © 2012 by Joe Brancatelli. All rights reserved. |