Wednesday, 18 June 2008

A longer look at Aviation - Pre and Post Peak

We've covered airlines here also earlier, but now it's time to take another quick, but more long term look at some of the issues of aviation industry.

Jet fuel Crack Spread

Airline fuel costs are rising faster than crude oil price

Jet Fuel premium over Gasoline

The refineries are geared for gasoline (it seems) and the premium for jet fuel over other distillate products is increasing.

Fuel vs Labor costs

Fuel costs have surpassed labor costs some time ago. Even if oil would stabilize at avg. level of $100 for 2008 (completely hypothetical and impossible, imho), that would still represent a c. 35% rise in fuel costs over their 2007 costs (year to year). This cannot go on for long, 2008 will be ugly for the airline industry, but wait till recession really hits in 2009 and if the jet fuel price does not crash.

Fuel costs have climbed over 200% in 8 years

While fare costs are going down in nominal terms and
quite a lot in real (inflation adjusted) terms.

Airlines are sacking people at rapid rate

Delta just let 4000 go. Analysts are saying 22 000 need to go this year alone. But it's still not enough to control costs, which are making the industry lose c. $10/passenger (US). USA's seven largest airlines lost $1.32 billion in Q1 alone. The same trend is going on elsewhere in the world. This is not unproblematic, as the satisfaction for airlines is going down, causing contradictory pressure to lower prices, in order not to lose customers.

Lots of airlines have gone/are going bankrupt already

That's just H1 and USA only! Alitalia, Mesa Air, etc. The risk watch is growing. 24 airlines gone bust in the past 6 months alone worldwide. And that's just the beginning according to many.

But there is still too much over-capacity on many areas and the demand is highly price elastic, so one cannot easily transfer fuel costs to prices. For one fairly small airline, a drop of utilization ratio of 1% cuts revenues c. 10%. The same applies to avg price of fares. Nobody wants to lose customers, so we are beginning to see airlines start to death spiral in unison while waiting others to crash first. US airlines have now started raising prices slowly, but fuel costs have far outpaced both fare hikes and conservation efforts.

Lots of more bankruptcies are predicted, unless kerosene fuel price drops rapidly. It's not enough to crude oil to correct some. It needs to be a big correction and also mirror in the kerosene price.

Share of fuel cost of all costs is nearing 40%

It's getting so desperate, that airlines are stripping everything out of the planes to save on fuel costs (drinks, jump seats, carts, etc). I have read that the only thing they've not allowed to take out is the pizza oven (only in America, lol).

Further, Boeing and Airbus are already seeing their orders go down. Many airlines can't afford to order/lease the new fuel efficient planes, even though they could bring an additional -20 to -30% fuel cost savings (at max). Besides, the planes are still too far off into the future to save them now, even if they had the financing.

Now, that's just now, before we've gone past the peak (a mere plateau) and with no fuel supply disruptions and a fairly moderate oil price rise, if you ask Matt Simmons.

So, what are the analysts saying that will happen after this first round of cleansing:

I'm not all too convinced of that. Skrebowski/IEA/et al prediction for the major oil crunch is coinciding at 2011.

That can't mean good for the aviation industry anywhere in the world.

Fuel efficient planes like A350XWB will go into service 2013-2015. At about the time when IEA says we will go into uncharted territory in production. According to Skrebowski, we are already at peak and probably past by that time.

Post Peak oil is predicted to make aviation a sunset industry

Of course there are many small 'positives' out there: too big to fail, politically important, alternative fuels may help a little at some point in the future, etc.

However, for the next few years, unless both crude oil and kerosene prices really crash 50%, I don't see a lot of hope for the airline industry. Sure, it'll continue to operate, and prices may not rise abruptly, but once they do, I don't think we will go back to the merry days of yore.

As such, barring any unforeseen events, I remain quite pessimistic about the aviation industry and about any ordinary business/tourism travel that relies on such a cheap form of travel as we have become accustomed to.

It probably will survive in some form even after post peak, barring a really catastrophic overshoot cliff type drop-off. However, most of us mere mortals will be priced out of the market.
As a postscript it is worth noting that all of this does not take into account the risks that aviation faces from being forced to play real level fuel tax and becoming part of the emission cap & trade system.

If that were to happen and the price of emission contracts would rise to the predicted level of four times of the current price or more, well let's just say that the personnel aviation industry would cease to exist for all practical purposes. Of course, those who could afford it, would continue to fly. That excludes you and me, though.

So if you are a risk taking enterpreneur, perhaps it's time to start thinking inventive new uses for all those aircraft hulls that will otherwise litter some unnamed airplane graveyards.