IF oil stays at $75 or goes higher...
 

from Michael Boyd:

If oil stays at $75, or goes higher, we can expect some very fast moves by the airline industry:

Fares: No More Testing The Waters. Whether it's via a $20 fuel surcharge, an across-the-board fare hike, a juggling of fare buckets, or a combination of the above, air fares will be jacked up materially.

Traffic: Strong Economy Or Not, It'll Head Down. Keep in mind that as airlines find it imperative to raise fares, gasoline prices will go up, too. That means less disposable income to take the kids on a vacation to see grandma. Less in the travel budget at businesses. So, demand will drop - albeit unevenly by region and by market - and carriers will find it necessary to slash capacity. That's hard to do when you've got a bunch of new airplanes on hard order. Easier to do when you have a static fleet, and the ability to park some birds in the sun.

Fleets: Call Your Realtor At Coolidge, AZ. Desert space will be at a premium for airplane parking, as carriers cut back capacity. Carriers in the best shape, at least fleet-wise: Northwest, with a flock of DC-9s that can be easily parked and have little or no debt service. American: a large fleet of MD-80s that can be parked, aircraft rental costs notwithstanding. Delta: it has plenty of excess RJ lift that can come out, and, possibly, dumped under Chapter 11. Airlines in more difficult shape: those that a) have lots of new airplanes on order, and b) are focused on a plan that's predicated on domestic traffic growth to carry the day. Draw your own conclusions regarding who's who.

Labor: Already Pretty Much Bled Dry. Unlike in the past, labor cuts are not going to be in the cards, except possibly at Southwest, and - as if it matters - at some "incremental lift re-sellers," a.k.a, small jet providers, a.k.a. regional airlines. This latter segment will be hit very hard, as the ability to generate sufficient revenues with high-cost 50-seaters will be even more dicey.

Rural Air Service: The Bar Is Going Up. The costs to access the incremental revenues at smaller airports are going to go up astronomically. That means that the ability of some communities to continue to support air service will be torpedoed

[QUOTE=RockBottom]from Michael Boyd:


B.S... People will still travel to go on vacation, to job interviews, or to see grandma.

Remind me why I decided to go into this business?

I disagree that traffic will go down. I think as gas prices skyrocket, flying seems more affordable to some people who would normally drive, even if the fares are higher.

At some point though, if oil was at $150 a barrel and it cost $1,000 to go coast to coast, people would not be going on pleasure travel trips as much.

That is a fact.

Not so long ago, it DID cost $1000 to go coast-to-coast.

Like it or not, airlines are not non-profit organizations. They cannot put out a product (seats from A to B) at below cost and survive.

Instead of passing along higher fuel costs to employees salaries, they absolutely MUST pass along these costs on to the consumer/buyer/flyer, in the form of higher airfares.

In short, it SHOULD cost $1000 to fly coast-to-coast, if that is what the airlines' product costs them to produce.

Wow! Well there ya have it folks! We got it all figured out!

I also disagree that traffic will go down. Air travel isn't that much more expensive than road travel if you think about it. A mooney burns about 15 gallons an hour, but it can go about 250 miles in that hour. that's 16.6 miles a gallon. about the same as most SUV's and Pickups on the road today. and you get there ALOT quicker, with only paying about $1.5 more a gallon for aviation fuel, and having the pleasure of flying there!! If anything, I think the traffic will increase, because even if the airlines raise prices, it will still save lots of time, and money. From atlanta to new york and back to atlanta driving is 1760 miles. in a car with 20 mpg, that's 88 gallons, at $3/gal it's $264 in fuel alone. not to mention 25 hours of driving, and eating. you can get a round trip ticket for atlanta/new york for about the same price, plus they give you peanuts and a sprite, and it takes about 4 hours instead of 25. I don't see air travel being taken down too much because of this. Now, another terrorist attack is a different story, let's just all hope and pray.

it doesnt need to cost 1,000 dollars to go coast to coast, bump everything up 10% instead of charging 300, charge 330. Instead of 120 down to florida charge 135, flying would still be very cheap compared to 10 years ago yet not out of the everyday workers reach
I cant believe the million dollar CEO's cant figure this out for themselves.

These guys will eventually come around to thinking that way, but not until they have the wages of labor securely under a rock, and not until Southwest's fuel hedges run out and they begin to raise fares. Until that time, I foresee nothing but the status quo continuing (management at bankrupt carriers determining overall industry fare structures by offering their product at less than fair market value simply to generate cash flow and maintain market share). Robert Crandall nailed it in the 90's when he said: "The airline industry is constantly at the mercy of it's dumbest competitor".

Once managements industry-wide have squeezed every dime out of creditors, vendors, lessors, and labor, they will then begin to 'right-price' their product and continue to 'right-size' their airlines.

This thread is interesting, but just imagine Iran lobbing a bomb over into Baghdad or Jerusalem... How will the world look when oil is $400.00 a barrel?:eek:

First of all, Michael Boyd's prediction of the future holds no more weight than anybody else's. In fact, Michael has a POOR track record of getting things right. Secondly, if oil hits $150 pb, or $400 pb as one suggested, the state of airlines would be the least of our worries - the economy as we know it would simply melt down. Oil will hit a price (soon I hope) where the consumers will say enough is enough. Our buddy who drives his Suburban or Expedition to work everyday by himself will finally wise up and start to conserve. Only when the demand falls will traders and big oil companies begin to ease prices. It is really more up to us now than them as they will continue to squeeze every last dime out of us as long as we let them. It sure seems to make sense to me to start pouring money into alternative fuels but what do I know? I fly for a living - my judgement is proven flawed.

HAHA!! That is funny, and true.
I agree with you that the airline business is the least of our worries in the case of $400 pb, but I believe the economy would change, not meltdown. As long as government doesn't try to meddle too much, I think the market will work its way through the problem.

It's already changing for me... Last week I was driving my mini-suv to the gym. Day-before-yesterday I rode the motorcycle because it gets 35-37 mpg. Last night the gas station where I buy the majority of my gas raised their per-gallon price of premium $.06... This morning, I rode my bicycle to the gym... If it continues to go up at this rate, I'll sell the SUV, give up the gym membership (too much $) and do push-ups in the unemployment line...

Murph

SUV's are going to be a dime a dozen pretty soon.

I own an SUV that gets 15mpg. For the same price, I could have bought a 7 year old car that gets maybe 25mpg, maybe 30 if I am lucky. I drive about 8,000 miles a year. Lets say gas in $3.00 a gallon. It works out to about $500 more a year. I am sorry, but I live in snow country, and I love my 10 year old SUV. $500 a year to drive my SUV will not cause me to give it up.

Actually, it's $640 a year if you could get 25mpg and $860 if you could get 30mpg.

This mentality is exactly the reason why SUV's have become so popular. People think they're safe and a necessity for "snow country". People want the extra room for family road trips, but just about all the SUV's I see driving around only have 1 or 2 people in them. They've become a status symbol. Not saying you bought yours as a status symbol, but a lot of people do, ie: the Escalades, Hummers, Denali's, Excursions, etc... $50,000 SUV's to cruise around alone in. I know this is the great United States of America, land of the free and buying nice things with our hard earned money is our given right, but at the same time I sometimes believe we are a greedy, self-centered nation that likes to waste resources because we can. You talk about money that you'd be saving when I see gallons of gas that the country would be saving. Demand goes down and so does the price. Now I don't know how many SUV's are driving around the country, but I'd say the number is astronomical, probably in the millions. The difference between 1 million SUV's getting 15mpg and 1 million automobiles in their place getting 30mpg is 267,000,000 gallons a year savings. It takes 42 gallons of crude oil to make 19.5 gallons of gasoline. That's 9,281,429 barrels of crude oil per year at $75.00 a barrel (almost $700,000,000 per year). Granted, some people have a legitimate reason for buying such a vehicle, but there a lot that you well know don't. We will learn sooner or later.

In fact, the waste of gas seems to be a perverse part of the appeal for a lot of folks- viz. the little display in some Fords that gives you your gas mileage in real time, which seems to have no purpose other than showing you exactly how much gas you're wasting. I saw a guy sitting on the street last year in an Excursion with the engine running, all windows down, and the A/C blasting high enough to be felt about five feet away-shot me a nasty grin when I looked in at him, seemed clear he knew what he was doing. Big SUVs were also incongruously popular with warlords in the Balkans during the sanctions of the '90's- they suggest that you not only have the money and connections for the car itself, but also the dough to keep it running...

The price of oil is such an issue as long as it stays below the costs of alternative fuels. I personally am not worried about oil going to $450pb because by that time, alternative fuels such as corn-based products would replace the oil. I think alternatives are about twice the price of gasoline and such right now, (E85 is subsidized, I believe) but once they become the cheaper alternative, people will start buying them at the pump and our dependence on foreign oil will drop.

Does this mean I shouldn't bop around in my F-350?

As long as a few nits are being picked... "It takes 42 gallons of crude oil to make 19.5 gallons of gasoline." ...implies there is 22.5 gallons of waste. But that crude goes into making the myriad of other petroleum products including plastics, diesel, Jet-A(!), and so on. So there's something wrong with the arithmetic there, but it's minor and it's too late to figure it out...

I didn't mean to imply that the remaining 22.5 gallons is wasted, but when refineries are running near full tilt to produce X amount of gasoline for us, price goes up. The can only refine so much.

I agree with this statement, but would replace greedy and self-centered with uneducated. People just don't grasp the concept of supply and demand anymore. The only reason the oil companies are making such high profits is because they are selling so much gas!! SUV's and huge trucks litter the roads and highways, getting terrible gas mileage and sitting in gridlocked traffic for long hours. The ones to blame for our high prices are our representatives in D.C. that tax the @$#& out of every gallon of fuel that is sold in the US, and the US consumers for creating a market for gas guzzlers and suburban sprawl.

This just in...just heard on the news that the big oil companies are expected to announce their first quarter profits of $19 Billion....$19B!

Meanwhile, on the way home from work tonight, I saw gas at $3.57 a gallon here.

UN security council deadline for Iran is set for Friday.... after that oil prices could skyrocket in the wake of sanctions.

!
 

You mean....they haven't already?

Traffic won't head down. If gas prices raise, so will the cost to travel cross country in a car. In europe, gas has always been high, but that hasn't been stopping people from traveling, in fact its just gone up.

TankerDriver, I just thought it needed that clarification, for the uneducated who may be wandering by. You are currect.

But with all respect, we need to see that number as it related to profits per gallon (which various sources peg at between 9 and 20 cents) and on a percentage of total revenue (under 10%). [Compare that against 40 to 65 cents per gallon of government taxes! ...and the percentage against other industries, which range upwards of 25%!]

The problem is that too many gallons of gasoline are being purchased, not the profits of the oil companies. They are just making it up in volume.

I agree Pharaoh, people need to cut back and drive as little as possible. But we're talking about 19 Billion just for 3 companies and just for the 1 quarter of this year? Let's just say that I'm not crying in my coffee this morning for those guys. I am choking on my coffee however, when it takes me over $50 to fill my Toyota Avalon.

message deleted by b2p.

The obscene profits being posted by big oil is happening only because we allow it. Curtail the demand - supplies go up and prices come down. Economics 101. There will be a time in the future that the oil cartels will not be able to hold us hostage. Unfortunately, it will take a lot more pain before we wise up and seek alternate paths to oil on a serious and committed basis.

This is a brief summary of an analysis I heard on NPR a few days ago:

It is important to understand that demand has a huge impact on price. For instance, a 5% drop in demand will send the oil prices crashing.

Up until recently we've seen the consumers ignore the price hikes. The demand, in other words, was unaffected as the price crept up. Finally we've reached a price point where the consumers are starting to pay attention. For the first time oil consumption in the USA dropped 0.6% on a month-to-month basis.

This is huge. What it means is that any further price increase will result in less consumption which in turn will reverse the price increase. The demand won't drop by 5% thus sending the prices crashing, but it will drop more than the 0.6% if necessary and keep the oil price in check.

In other words the current market has reached its peak.

The problem with economics 101 is that the gas companies are doing bizzaro economics. More money in this case doesnt seem to make more oil. They can only produce so much per day. I saw on CNN (which of course has to be true :cool: ) that global demand actually dropped 1.9% last quarter and they raised gas prices. Demand goes down: gas price goes up, demand goes up: gas prices go up. Its bizzaro economics.

There's lots of interesting statistics and info on SUV's on http://www.suv.org.

Whether it's all true or not is the question, but the site comes across well written with lots of cited info from reputable sources. Some of it comes across a bit "Green Peace", but for the most part it's good stuff.

There were certain things that I didn't know about SUV's, like how they are exempt from gas guzzler tax (more profit for the car companies) and how they have lower fuel consumption standards because they are considered "light trucks".

I think there is a place and time for the SUV. In fact, my wife and I own one. However, we went with a smaller V6 powered one, based on a car chassis that gets somewhat better gas mileage than it's V8 counterparts (we average about 18-20 mpg around town and maybe 23-25 on the highway). We also try to use my car as much as possible, which has a 4 cyl and gets 25+.

Neil Cavuto on Fox News nailed Senator Durbin on that very point, and asked the senator about the "Tax Gouging" and what could be done about that. In fine politcal fashion, the senator side-stepped the question and kept up with the mantra of "punish the evil oil companies."

Maybe we can get the oil refining outsourced like everything else has been in this country, mainly due to government restrictions and interference! China is negotiating with Cuba to conduct offshore drilling there, maybe they'll sell us cheap gas once Washington beats down our oil companies.

P.S. I got the above info from Rush Limbaugh, so it MUST be true!:rolleyes: (At least he had audio clips of Cavuto & Durbin)

Well, US consumption may have dropped by 0.6% or global consumption may have dropped by 1.9 %, but what is important is that these are the first signs of drop in demand. Up until now people were ignoring the price hikes. Now finally, the demand is dropping. The demand has to drop very little to significantly affect the price of oil.

The price of oil has peaked based on the current supply, and the current demand.

If oil stays at $75 or higher then UPS' profits will be even bigger than they currently are! Can you say fuel surcharge! OBTW, the surcharge more than makes up the increased cost of fuel. So, as the price of oil goes up, UPS' profits go up too!

What a concept
 

If the price of fuel was to come down say 10 percent, is it UPS' policy to drop the fuel surcharges accordingly? I can see your point that UPS has great profit potential with customers willing to pay these surcharges. The airlines have been unable to crack this code.

That is nice that they can only refine so much oil per hour, per day, etc. There is not a shortage of fuel right now. The oil companies are greedy and the gov is greedy. Screw both of them.

My truck has not moved in over 3 weeks.

I will no longer by any Exxon/Mobil products. That sucks because I like mobile one oil.

Getting ready to trade my miata (30mpg) for a vw tdi (40+mpg)

Yes, the fuel surcharge varies with the price of oil.

Hi C5Guy!

Any comment on the C-5 crash at Dover? What happened?

thanks,

Seaber

Let me guess...youre a republican. The fact is we pay less taxes on fuel than every other developed nation. Yup, Gas is the same price on the spot market, but the UK for example taxes it so that its 50% higher than what we pay.
In addition, we americans pay the third LEAST taxes in the developed world. Third behind Ireland and I cant remember who else in Europe.
I bet you think we shouldnt pay any taxes at all and that the services government provides will just fall from the skies, huh? Its that same attitude that the public has about airline travel, and why the airlines cant raise that fare 20 bucks to pay for your salary.