Airline Industry in Crisis Mode

You wonder how most of the highly paid CEO’s, managers, and financial officers of the airline industry could have been so unprepared for high fuel prices. The warning signs have been loud and clear for the past few years. Now that crude oil is approaching $150 a barrel the airline industry with few exceptions is operating in a panic mode.

I saw a CNN special presentation last night that had as its title, “We Were Warned - America Out of Gas. The same holds true for the airline industry. They were warned but except for Southwest Airlines and perhaps one or two others, like Jetblue, the highly paid executives were too busy enjoying their perks to listen up. Now, they are in fact paying through the nose for jet fuel with no end in sight.

In the CNN special there was a very interesting segment featuring Sir Richard Branson, the founder of Virgin Airlines. Sir Richard was quite straightforward in his assessment of the energy situation. He stated that the shocks to the world financial system will be greater than the combined effects of World Wars One and Two combined. To try to save the day he thinks, quite correctly in my opinion, that it will take a huge emergency effort on the part of world governments, by industry and the public. He is not at all sure that we will have enough time to move to alternative energy sources before time runs out and we are at nearly empty.

Any period of disruption in oil supplies to the American economy will cause a huge decline in business activity. The airlines will be at the forefront of the devastation but almost all businesses and our very way of life will be affected. Just think of the huge travel industry that will be affected as airline travel is reduced. Hotels and spas, travel agents, taxi drivers, restaurants, gift shops, duty free shops, airport workers, all will be hurt along with countless other businesses as the financial fallout cascades into the economy.

The airlines are already taking a series of unpopular steps in a desperate effort to stay in business. Airlines are retiring older more fuel inefficient aircraft and reducing their fleet sizes. They are reducing the number of flights. Almost all of the airlines are downsizing and reducing the size of their workforce.

In addition, airlines have raised fares and will continue to do so. They are also nickeling and diming passengers to death by charging fuel surcharges and by charging for checked luggage and for everything else including soft drinks and peanuts. Forget about meals if you are flying economy class.

If crude oil prices stay above $135 a barrel the airline industry, or what is left of it, will be totally transformed within six months. The industry will have fewer flights to fewer destinations. Smaller market areas will probably not be served at all. With fewer flights airlines will try hard to pack as many passengers on each aircraft as possible in order to raise load factors.

The bottom line. Passengers will pay more airfare, a lot more, for less convenient flights on crowded flights with less service.

Of course, if you have money to burn you can still book first class flights or business class flights and at a premium price probably still receive decent on-board service. It will be the mass numbers of economy class passengers who will suffer. The days of the great buses in the sky may well be over.

The death spiral for quite a few airlines has already started. Within six months to a year you can expect a number of additional bankruptcies, liquidations, and consolidations. The new world of air travel may have vast numbers of former passengers deciding to just stay home.

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