Oil at $80/barrell

[tlax25]

I was wondering what everybody thought might happen to the industry should oil hit $80 a barrell this summer. I have read about this possibility in several different newspapers over the last couple of weeks. If this should occur, what would the effect be on the airline industry...particularly on the price of airfare? I know it will continue to curtail the little amount of actual flying I do now in the 172 I rent every once in a while. Do you think this might lead to re-regulation in some form? For some reason I do not think the government is going to let any of the big legacy carriers go away.

 

[labbats]

I'm far from educated on these matters, but here's my opinion....

Those airlines in bankruptcy will, believe it or not, finally fold.

I'm almost hoping it goes up more. It will most likely just hurry along this laborious process and force some issues to be resolved, for better or worse.

 

[Captain Overs]

I don't think you'll see ticket prices rise. The airlines have never passed that cost along to people. Continental tried it a few years back with a "fuel surcharge" of $10 per trip and Northwest didn't follow suit so they pulled it back.

 

[ivauir]

For some reason I do not think the government is going to let any of the big legacy carriers go away.

You are wrong about this one. Unfortunatly, I think the gvt is doing a poor job or refereeing the game, but there is going to be at least one loser this round. My guess is that we'll lose two.

 

[Dizel8]

"I don't think you'll see ticket prices rise"

Well, they will have to eventually, if the price of oil does not soon stabilize and or decrease, even a great company like SWA with their great hedging program will have to increase fares to cover cost. SWA is doing well now and will for a long time to come, believe they are hedged until '08 or "09, however, at some point, no one will sell these low hedges, unless oil goes down, and price for SWA will increase. At that point, they will have to raise fares.

As for the rest of the airline, at best they will continue to see SWA grow and prosper while being unable to compete, at worst, more Ch.11s and maybe even Ch.7s.

 

[skykid]

Besides the obvious oversupply of seats, the reason airlines aren't raising prices to cover the higher fuel costs is the industry is in a giant game of chicken. Prices are controlled by those with enough cash reserves to wait for others to fold. I would argue that even though a few of the so called LCCs had a moral victory with modest profits, nobody is making money. If U has to liquidate (which I believe is a matter of time since they have essentially the same poor route structure they had 6 years ago), I think we will see prices go up. You could double the prices on airline tickets and this would still be a cheap era to travel. LCCs are going to keep dominating domestic pricing, so relatively low prices are here to stay. So are low wages.

 

[Boeingman]

Besides the obvious oversupply of seats, the reason airlines aren't raising prices to cover the higher fuel costs is the industry is in a giant game of chicken. Prices are controlled by those with enough cash reserves to wait for others to fold. I would argue that even though a few of the so called LCCs had a moral victory with modest profits, nobody is making money. If U has to liquidate (which I believe is a matter of time since they have essentially the same poor route structure they had 6 years ago), I think we will see prices go up. You could double the prices on airline tickets and this would still be a cheap era to travel. LCCs are going to keep dominating domestic pricing, so relatively low prices are here to stay. So are low wages.

Good analysis, except that it is not only cash reserves alowing some carriers time to wait for others to fold. The continued pumping of money by lenders (as well as the relaxation of covenants) into failing carriers extends the process and time line. I also think dare I say that the bankruptcy process is in desperate need of reform.

It simply amazes me that U has found more money from outside investors. I read recently the recent cash infusion from Air Wisconsin has already been burned through with February's losses alone.

 

[jamesslally]

I just read in USA Today on Monday that UAL has 30% of its fuel hedged (I believe it said for the year) Now I don't pretend to understand the economics of the airline industry, but it seems pretty ridiculous that UAL is able to default on a $300+ million payment to the city of Chicago / Ohare, but be allowed to spend money on fuel hedges. WTF is up with this??

 

[Dizel8]

At what price were the hedges though, that is the big question?

As for ridiculous, as the lessors how they feel about being unable to repo the planes!

 

[Ted Striker]

I just read in USA Today on Monday that UAL has 30% of its fuel hedged (I believe it said for the year) Now I don't pretend to understand the economics of the airline industry, but it seems pretty ridiculous that UAL is able to default on a $300+ million payment to the city of Chicago / Ohare, but be allowed to spend money on fuel hedges. WTF is up with this??

I was under the impression that they couldn't do that due to being in bankruptcy. Wouldn't be the first time I was wrong!