Thursday, June 05, 2008

Airlines, Capacity and Survival

For airlines to survive the revenue per used seat mile must exceed the cost per used seat mile. For some this is “Rocket Science”, for others it is elementary math. For anyone in the airline industry it is an obvious fact.

Currently fuel prices are in an upward spiral, out of control and irrational. That does not change the fact that they are up 100 percent in the last year. Fuel would seem to be a constant fraction of costs, about 30 percent. Not true, the fuel fraction of costs is actually about 67 percent due to its influence in the other sectors.

The era of cheap travel is gone. So long as our governments allow the price of energy to be artificially inflated, the airlines have no choice. They either raise the yield, that is the revenue per aircraft mile or they go out of business.

The number of people traveling today is based on old energy costs. When the price of flying doubles, which it must, the number of people who can afford to fly drops about 75 percent. People who can afford the higher fares will not fly in the current cramped seating. Thus, the airlines need to cut their capacity by about 60 percent. With 40 percent of the aircraft flying at a lower load factor the airlines can make money.

There is an unintended consequence. Places that depend on drive in traffic will do okay; these are cities like San Diego whose tourism comes mostly from Los Angeles. Areas like Hawaii, whose tourists are almost exclusively air travel customer, will have a major problem as their lower end customers stay home.

Stand by for more economic bad news brought to you by the current administration. But, the Democrats have an even worse solution. We need an energy plan. Watch this space for a real one.

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