Rising fuel costs may hurt airlines

The airline industry is one of the segments of the economy that is most vulnerable to steadily climbing oil prices. Fuel is a large part of the cost of running an airline and when fuel prices increase it cuts into an already thin profit margin. When fuel prices spiked in 2008, CBS News reported that for every $1 per gallon that the price of jet fuel increased, it cost each airline an extra $60 million per year.

Airlines coped with higher fuel costs in several ways. To passengers, the most obvious methods were fuel surcharges on tickets and adding fees for baggage. The companies also grounded older, less fuel-efficient airplanes, changed schedules to drop less profitable routes, and furloughed (laid off) employees as the demand for air travel decreased. Four years later, fuel costs are once again approaching 2008 levels.

Although the airlines were starting to finally recover following the 2008 oil shock and subsequent recession, it is likely that the current increase in oil prices will blunt the airline recovery. As oil prices increase, so will the price of tickets. Basic economic theory teaches that as prices increase, demand will decrease and the airlines will sell fewer tickets.

The price of tickets is not the only problem however. Rising oil prices also mean that other goods and services will cost more as well. If people are paying more to fill their car with gas, as well as more for food, energy, and practically everything else then they will obviously have less money to spend on airline travel. The same logic applies to business travel as well. If the business is paying more for other budget items, there will be less money to send employees on business trips. In many cases, new technology such as online meetings and teleconferencing can take the place of face-to-face meetings.

A Raymond James analyst told FlightGlobal .com that 2012 could be a good year for the airlines if they focus on profitability at the expense of market share. In essence, carriers would keep capacity low and focus on profitable routes while maintaining maximum efficiency. This means slow or no growth for most companies with hiring mainly to replace attrition.

How bad the situation will be for the airlines is directly related to how high the price of oil goes. If the price of oil stays below or near its 2008 high, then the effect on the airlines will be minimal since bankruptcies and cost cutting have already made them much more efficient that they were previously.

However, as the Atlanta Conservative Examiner notes, if the Iranian nuclear crisis results in a military strike or war then the price of oil could double or more. This would be catastrophic both for the airlines as well as the economy at large. In that case, the outlook for both airline profits and hiring would be extremely poor.

This article originally published on Examiner.com:

http://www.examiner.com/aviation-in-national/rising-fuel-costs-may-hurt-airlines