The impact of rising jet fuel costs on the airline industry's bottom line has been substantial. From yesterday's Washington Post:
Faced with skyrocketing fuel bills, major U.S. airlines have announced nearly $1 billion in losses for the first three months of the year, a financial toll that is forcing carriers to slash flight schedules, cut jobs, add passenger fees and even seek potential merger partners.
It would be nice if the tone of the article were a little bit different. When the price of an input rises, then of course less of the output will be produced. This is one of the least subtle lessons in introductory economics, right along with the rise in the price (here, the fees) of the output. But when it's the airlines, we're now "slashing" and "cutting." It's a supply curve shifting. Chill.
If you run the numbers, you see that the airlines can't possibly be making money with the fares their charging and the costs they're paying. Fuel costs have nearly tripled since 2000. What's disappointing--as a reasonably frequent flyer and a would-be admirer of the industry--is how its leaders seem to be distracted in making the changes that need to happen. I'll give them two pieces of advice.
First, stop looking to mergers to reduce capacity. There is plenty of redundancy within each hub-and-spoke carrier's route system to make the reductions. And that can happen without getting the DoJ involved.
Second, go find an airline that's doing well and copy it. In terms of performance, Southwest is the industry leader. Do what they do. It's good stuff. Yes, Southwest will be subject to the cost pressures from jet fuel purchases. But is there anyone who doesn't think it will hurt them less than the rest of the industry?
Both pieces of advice go to the industry's confusion of size for profitability. It is much better to make "small" profits than "large" losses.
Airlines
Hi,
You should tweak this a bit and send it as a letter to the Editor of the StarTribune in Minneapolis.
The only folks that look to make out are the top management (esp Northwest) as various Golden $$$ Whatevers get activated to their benefit.
They promise to keep all hubs going - but why?
Their fleets of aircraft could hardly be called a good match.
Delta - all Boeing except no 747s + old MD 88 & MD 90
NWA - new planes are Airbus; the only Boeing is the 747 + they have ancient DC-9s.
Pilot seniority issues abound on both sides.
The best reason to Go For It now seems to be the possibility that the Republicans will lose the White House.
Hubs that would go
Cincinnati and Memphis would get the boot, not MSP.
Minneapolis St. Paul would continue as it is today; it is the profitable gem in the crown for Northwest and Delta isn't about to downsize a profitable hub. Yes, we pay something more for flights, but it means that the same number of flights and destinations will be available to us (MSP fliers) as we have today according to aviation industry analysts. Several interviewed in this article say that the impact to MSP fliers would be virtually zero.
For the pilots dealing with seniority issues it might be a different story.
Read about it here: http://www.startribune.com/business/13735276.html
Bridges failing at warp speed
I-35 bridge down (collapse). St. Cloud shut down (gusset plates deformed) and waiting for new bridge to be constructed (two years). Lowry Ave. Bridge (Minneapolis) closed suddenly today (pier flaw which could cause collapse when temperatures rise) and replacement not expected until 2011.
Next on the list for sudden shutdown is Hastings (another major crossing over the Mississippi) Bridge. After that possibly Stillwater bridge (low rating, fracture critical).
These represent over a billion dollars in replacement/repairs that we don't have . . . right now we are running on about half the budget needed to just maintain roads in this state.
The Republicans better hold their Minneapolis convention right quick, while they still have a few bridges to use to get there.
I'm wondering how much more we have to cut taxes to get to prosperity in Minnesota. All we get for underfunding government is bad roads and collapsed bridges. Could somebody explain how this starve the beast thing is supposed to work?
Southwest makes all their money buying crude oil forward
If you strip out the gains from hedging their crude oil forward in a rising market, does Southwest the airline actually make any money? Why not just ditch the whole airline thing entirely...
Management used to mean that you "managed" things
22:49 beat me to it.
Given you a subtle hint: there are fixed costs, and there are variable costs. Most variable costs associated with markets can be hedged.
Airlines have to own (or lease) airplanes. That's a fixed cost. Can't fly a 747 from NYC to SFO--whether through CVG, MSP, or noplace--if you don't have a plane.
Similarly, you need staff to maintain, fly, and steward those planes. Salaried--fixed cost.
What you CAN control are the variable costs: expecting to use 100MM gallons of jet fuel next month, next quarter, or next year? Buy some futures contracts, lock in the price, and voila--the Marginal Cost of a seat is a lot better known. Price accordingly, with benefits to those who pay more.
No airline should be losing significant amounts of money because of jet fuel increases--unless they didn't expect to be in business during the time of the price run-ups.
Cut back service? Great. That's both revenue lost and market share you may not get back next time the person flies.
No one ever got rich selling dollars for $0.80. But no one ever went broke selling $1 for $1.10, if they managed there costs to be LQ $0.10.
Unless you're suggesting the business of airline managers isn't to manage their air traffic costs and revenues...
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