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Airline economics

June 10, 2008

For an industry that’s already skating on wafer-thin margins, a 72% annual increase in fuel costs has sent the business reeling. It’s almost impossible to plan for an increase like that and certainly no way this can be passed directly on to consumers in the form of fare increases.

The future for consumers looks tough with airlines taking more planes out of service leading to overcrowding and fare increases many business travelers will be asking themselves is they really need to travel. The video conferencing industry, so long talked about as a viable alternative, may at last see the boost it has been promised for so long.

This quote is from the Business Travel News 2008 survey.

The Air Transport Association last month
projected the domestic industry’s fuel bill this year will be 72
percent higher this year than in 2007, while JP Morgan’s Baker last
month projected the cost of fuel to bleed industry profits dry in the
next two years, forecasting a “an all-time record” $7.2 billion
operating loss this year and a 2009 operating loss of $8.1 billion.

“Certain more modest forecasts are difficult to
reconcile absent heroic fuel declines or unprecedented demand growth,”
Baker said. “A war of attrition appears to be underway. One belief is
that airlines will act collectively to massively reduce capacity,
leading to near-record fare improvement, but management may instead
engage in value destructive behavior as they attempt to merely outlast
one another—after all, capacity cuts thus far fall meaningfully short
of what we and most executives deem necessary. At current fuel prices,
legacy bankruptcies and/or merge-at-all-cost attempts are a question of
when, not if.”

Rising costs may have one positive effect, reducing the carbon footprint.

Posted by Ed Cotton

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