Monday, 16 June 2008

Daddy, can I still fly?

The aviation industry after peak oil would not fair very well, according to Roger Bezdek (MIS) who's studies the situation.

Regardless, he does not think that aviation will just stop. It is too important to fail. Much of the middle class will just be priced out. The trips will be fewer and not as far.

Still, the current estimates for aviation growth within the industry seem greatly exaggerated. They assume a standard 2-3% annual growth for the next 20-30 years, with no hiccups.

It does not require an Einstein to see where the problem is.

Many investment bankers are predicting a wave of bankruptcies for 2009-2010, if oil doesn't fall to c. $80 and kerosene crack spread down to $5. Some analysts are saying that prices of fares need to double this year, if oil hits $150 for a longer period.

As that is unlikely to happen, even the airline industry is saying that there will be a fall out.

However, unlike so many others, they believe the current run up in prices is mostly speculation. They are joined by a group of analysts and bankers:

"What has driven the market so far, so far, in our view, is that such a high percentage of the speculative trade has become aligned in one direction.” - Tim Evans, PM Energy News

"The increasing prevalence of futures contracts has transformed the nature of oil markets. It is no longer only about the value of oil as an energy commodity, but also… oil as a financial asset." - Goldman Sachs

"Our study indicated that for every $100 million in new inflows, WTI prices increase by 1.6%... Our conclusion from this study is that we are seeing the classic ingredients of an asset bubble." - Lehman Brothers

"There may now be upwards of $25-$30 of speculation in the price of crude." - MF Global Energy Risk Management

"So, is this a bubble? The answer is that the bubble is super-imposed on an upward trend in oil prices that has a strong foundation in reality." - George Soros

"Demand and supply fundamentals argue for oil priced well below $100 per barrel." - Mark Zandi

Even if there were a $30/barrel predium on oil and $20 premium on kerosene, that would still mean a price of c. $100/barrel - a rise of 35% for fuel costs year-to-year from 2007.

That is something that the airlines cannot stomach. Fuel costs have already jumped from being c. 10-15% of their operating costs to being 40% of their operating costs. Fuel has long since passed labor as the primary cost element, which is the reason why we haven't seen the last of layoffs in the industry.

Now why don't the airlines just raise the prices? Well they could, but as airline travel react fairly elastically to price rises, they would just get less passenger kilometers, thus not getting that much extra for the rise. Further, they would risk losing market share in an industry that is ridden with overcapacity.

So, they do not raise the prices, but swoon into a death spiral in unison. Eight airlines in USA alone have gone bankrupt in 2008. Alitalia is in the ropes. SAS is not fairing very well either. This is just the beginning if prices stay at near current levels.

So, if you want to air travel and care not for our precious climate - the time to go is now. Killoil Travels - What a Way to Go!