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Higher gas prices and air travel

To me, the biggest effect of higher oil prices is the havoc they are wreaking on the airline industry. Andrew Leonard looks at state of things on his blog, but I think there’s a lot more analysis to be done. A friend of mine who spent many years working at American Airlines remarked last week that there is not a commercial aircraft in the air that was built for these fuel prices. When you look at the purchasing cycle (and the research and development cycle) for commercial aircraft, you have to wonder how long it’ll be before more economical planes will even be available, if ever?

Aviation Week is predicting carnage for the industry. Oil prices are raising costs for operators and higher ticket prices are reducing demand. If the airlines don’t plan well, they could be flying half-full planes around the country at the highest costs they’ve ever faced. Here are the raw numbers:

There is a consensus among analysts that the average oil price for 2008 will be $107 per barrel. If that becomes a reality, the airline industry will have to shoulder $40 billion in additional costs per year and end up with a $2.6-billion loss for the period. At the current $130-per-barrel price, airlines will post a deficit of almost $7 billion.

But that figure masks the real extent of the problem, says IATA’s chief economist, Brian Pearce, because most European and Asian airlines are still relatively well protected by their hedging portfolios. The true additional cost burden at $130 per barrel is $99 billion on an annual basis, or a 20% increase in total costs.

I think the full implications of skyrocketing air travel prices are hard to impossible to predict. What’s it mean for business travel? For choosing where you want to live? Will we soon be adjusting to a world where air travel is once again a luxury product?

3 Comments

  1. The same is true for ground transportation. Cities are more affordable than suburbs (or exurbs) when a tank of gas is $60-$70 bucks.

    What I think is the saddest part is that people are still in denial about this. I hear folks say all kinds of dumb stuff about energy costs, but my two favorites are, “It’ll go back down,” and “They’ll come up with alternatives to oil.” As to the first, there is no basis for believing that. Oil is a non-renewable commodity, and the demand for it is increasing. As for the second, if they invented solar cars tomorrow, what would change? Would you file the VIN off your car, take the plates off and walk away? Would you expect that your car would have any value towards a trade-in?

    This is the crisis that has been coming since the 70’s. It is strange that we don’t recognize it.

  2. So to Bill’s point, my partner is a special education instructional assistant. My commute is a stumble from the bedroom to the guest room, where I keep the laptop, and my primary client is a block or two away.

    She drives 45 minutes to work with the kids, and though we could probably afford to live closer to her work, it’s not due to her salary, and most of her coworkers can’t.

    If gasoline gets too much more expensive, we’ll figure out something else for health care and she’ll find something closer to home.

    Wonder what that’s going to do to Marin County property prices when the mod to low-end workers can’t justify working there any more?

  3. @Bill, I drive a Prius, so hopefully I’ll get something for it, especially when the waiting list gets up to the year-long length.

    @Dan, we’re running into the same problem here in Houston, TX. For the last two decades, the emphasis has been on moving out to the ‘burbs–I even took the plunge for 5 years. These have seen phenominal growth, which is one of the reasons I chose to move back to the city (the commute times were creeping up to an hour each way)–the other being that I found the burbs to be boring cultural wastelands, whereas the city had all the arts, theater and museums that I enjoyed.

    Now we’re in the market for a house; unfortunately, while Hoston home sales are flat, the prices are still rising, probably because other people are waking up to the fact that commuting from the ‘burbs in an 14-mpg vehicle is unsustainable.

    My armchair predictions are that a) SUVs and Truck sales will collapse shortly (~$5-6/gal will kill them dead), and b) ‘burb growth will flatline and/or telecommuting will finally become generally acceptable.

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