     |
With airline price ticket, fuel prices are not the problem"AIRLINE PRICE TICKET" Can't find what you need? Try a Google Web Search in the box below!
11/1/2004 In early October, the price of oil topped $52 a barrel, representing a 60% increase over the year-ago period. According to the Air Transport Assn., every $1 increase in the price of a barrel adds $425 million in annual operating expenses for US airlines. That means they are spending an extra $9.93 billion on Jet A this year compared to 2003. Until oil began its climb to the stratosphere, 2004 was expected to be a breakeven-or-better year for US carriers, who hoped to reap the reward from more than $20 billion in cost cuts--painfully achieved--since 9/11. Instead, they are expected to report more than $4 billion in losses. In late September, ATA President and CEO James May put the figure at in excess of $6 billion. By contrast, airlines based outside the US--companies such as Air France/KLM, Qantas, Air New Zealand, Singapore Airlines, All Nippon Airways, British Airways, easyJet, Gol and LanChile--have remained profitable despite operating within a similar fuel environment. AIRLINE PRICE TICKET The fact that US airlines are being affected disproportionately provides ammunition for those who argue that more significant factors are at work. "Oil prices are not the problem," former American Airlines Chairman and CEO Robert Crandall asserted in a speech to the Wings Club of New York in September, adding, "In constant dollar terms, fuel prices have been higher in the past than they are today." As usual Crandall was correct. In 2004 dollars, West Texas Intermediate reached $66 a barrel in 1982 and did not fall below the $50 mark (on an average annual basis) until 1985. Interestingly, US airlines actually netted nearly $600 million (in nominal dollars) over those four years as $1.69 billion in earnings in 1984-85 offset a deficit of nearly $1.10 billion in the earlier years. Can't find what you need? Try a Google Web Search in the box below!
AIRLINE PRICE TICKET "You can comb the record of the last 30 years and you will fail to find any clear evidence that higher fuel prices caused earnings to decline," analyst Edmund Greenslet wrote in the June issue of his Airline Monitor. He noted that historically, when airlines have been hit by big increases in the price of fuel, they have been able to pass some or all of this on to the consumer in the form of higher fares. AIRLINE PRICE TICKET This has been happening outside the US. In October, British Airways passed through its third fuel-related price hike, a hefty 10 [pounds sterling] ($18) surcharge each way, on long-haul flights while the fee on short-haul flights rose to 4 [pounds sterling]. Air France, Austrian Airlines, Lufthansa, Qantas, Singapore Airlines and Scandinavian Airlines are among dozens of non-US carriers that have raised previously imposed fuel surcharges over the past few months. AIRLINE PRICE TICKET By contrast, US airlines on numerous occasions have tried and seemingly failed to boost fares. This despite record load factors on traffic that since April has exceeded Y2K levels (in early October it appeared that a $20 surcharge on most leisure fares would succeed). Speaking to ATW last month, Greenslet stood by his denial of a correlation between fuel prices and profits but added a caveat: "It's something that has always been true [in the past] and there's no reason it should not be true today, but it isn't--because of the timidity of airline management to do what they have to do." In his opinion, legacy airlines "are bound up in the idea that they cannot be seen to charge one penny more than the lowest fare that anybody offers out there." AIRLINE PRICE TICKET Michael Roach, an associate of Unisys R2A Transportation Management Consultants, argues that network airlines are themselves part of the problem: "The legacy carriers have been engaging in very aggressive competition against some of the new generation carriers, trashing yields themselves." Greenslet concurs: "What I've seen is that the prices of the big legacy airlines already are lower than the prices of Southwest, particularly in other than the very short-haul markets. The transcon is clearly that way. I've used those fares ... Now, if you are underselling this competitor, where is the problem in adding $5-$10 to your fare to accommodate fuel costs?" In its second Chapter 11 bankruptcy filing two months ago, US Airways Group did not accept a share of the blame for today's pricing weakness, but it also declined to attribute the filing solely, or even primarily, to the price of fuel. "It is beyond dispute that timing of this Chapter 11 filing was accelerated by high fuel costs," the carrier noted before adding, "While fuel prices accelerated the day of reckoning, it is the decline in domestic passenger unit revenues, not fuel prices, that is the central problem." And it attributed that to "the growth of low-cost carriers over the past 18 months and their increase in pricing power in the domestic market ... They now establish price levels in most of the markets in which legacy carriers fly." AIRLINE PRICE TICKET Without a doubt, LCCs enjoy a bigger share of the US market than many would have thought possible before the upheavals of the new millennium. As legacy airlines reduced domestic capacity by 16.8% since 2000, LCCs reported capacity increases of 25.9%, according to US Airways. LCCs enjoy a 26% share of domestic O&D passengers, up from 18% five years ago, Merrill Lynch states. They operate in 922 of the nation's top 1,000 O&D city-pairs and have a presence in markets that serve 85% of passengers. Last fall, JP Morgan identified more than 600 city-pair markets in which the one-way walkup Fare had been capped at $299 or less owing to low-fare competitors. Furthermore, the Internet has given the consumer near-perfect knowledge of these prices while putting low-fare airlines into the living rooms of millions of potential customers. Can't find what you need? Try a Google Web Search in the box below!
AIRLINE PRICE TICKET Regardless of whether the legacy airlines are themselves contributing to today's fare wars or whether it is entirely owing to the presence of LCCs and the Internet, there is no dismissing the impact on yield. In 2000, the nominal domestic yield for the US airline industry was 14.57 cents per revenue passenger mile. Over the next three years it plunged 16% to just 12.19 cents, and through the first seven months of 2004 it dipped another percentage point to 11.81 cents for legacy airlines, a level not seen in nearly a quarter of a century. Indexed to 1978 prices, it gets even uglier: Real domestic yield fell to 4.32 cents last year, the lowest it has been in the 78 years for which data exist. "In constant dollars, an air ticket now costs only half of what it did in 1978," ATA stated last month. Given the size of this decline, understanding why the rising price of fuel is having such a disparate impact on US airlines is not difficult. AIRLINE PRICE TICKET In his speech to the Wings Club, Crandall described the industry as "a commodity-equivalent business with excess capacity. Thus its participants have no pricing power and are unable to pass along cost increases to their customers." AIRLINE PRICE TICKET But is there overcapacity? That would be news to the average passenger. "The flights are full," observes Roach. "Nobody is flying around at 40% load factors, so how can you say there is excess capacity?" He continues, "Excess capacity is always a function of the price at which capacity is offered." AIRLINE PRICE TICKET Philip Roberts, VP and managing partner for Unisys R2A, echoes this thought. "On the one hand, there is not too much capacity in the market--the flights are full. There is, however, too much capacity considering the much higher prices that the network carriers would like to charge," he states to ATW. "On the other hand, there is a true excess capacity issue. It is the network airlines that are charging very low below-cost fares--putting unjustified yield pressures on the LCCs--as they chase cash to keep operating and/or out of bankruptcy. It is this below-cost capacity that needs to go, and the only way it goes away is if the network carriers either reduce their costs to/near the level of Southwest and others to be profitable at fares charged by Southwest and others or go out of business." AIRLINE PRICE TICKET But nobody goes out of business. Since 9/11, no airline operating more than a handful of aircraft has stopped flying, although US Airways may become the first. Crandall and others identify the Chapter 11 process as contributing to this phenomenon. Revising the laws to make it difficult for carriers to linger in bankruptcy for years "would lessen the intensity of this problem by removing untenable capacity from the system," he said in September. AIRLINE PRICE TICKET The bankruptcy laws are unlikely to be changed anytime soon, but on Oct. 6 United Airlines, which will mark two years in bankruptcy next month, unveiled plans to cut domestic mainline capacity (ASMs) by 12% while boosting international ASMs by 14%. The changes will result in withdrawal of dozens of aircraft as the carrier's mainline fleet drops to 455, 68 fewer than it flew in August and 112 fewer than it operated in 2002. AIRLINE PRICE TICKET In explaining the decision, United cited "fundamental changes in our industry, including ongoing high fuel costs, intense pricing pressure and continuing overcapacity." With Delta Air Lines hovering on the edge of bankruptcy and US Airways teetering on the brink of extinction, this could be the beginning of the return to pricing power for airlines. This, in turn, should help to transform the runup in fuel prices from a catastrophe into merely a challenge....... Compare a airline price ticket here /cheap airfares home |