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?