Ask the pilot

Peak oil threatens the airline industry, but Ryanair's CEO says tickets should be free.

By Patrick Smith

Read more: Technology & Business, Airplanes, Airlines, Business, Airports, P. Smith, Ask the Pilot

March 3, 2006 | I've written that the growing popularity of low-cost airlines is hardly an American-only phenomenon, and readers have asked for details. What constitutes a low-cost carrier, or LCC, is somewhat open to interpretation -- the Irish national carrier Aer Lingus, for example, is a club member in some circles -- but we'll stick to the more clear-cut examples. In no particular order, here are some of the more popular LCCs, broken down by region. Notice all the camel caps and infernally quirky monikers; any of several on this list are worst-named airline contenders. Those marked by asterisks, like United's Ted and Delta's Song, are spinoffs of legacy carrier parents:

NORTH AMERICA: Southwest Airlines, AirTran, JetBlue, Frontier, ATA, WestJet, Ted,* Song* (slated for demolition, spring 2006)

EUROPE: Ryanair, EasyJet, FlyBE, BMIbaby,* Air One, Air Berlin, Germanwings, DBA, Sterling European, SkyEurope (the pride of Slovakia), Virgin Express, Vueling Airlines, Wizz Air (I know, but maybe it means something different in Hungarian)

LATIN AMERICA: Gol, Volaris, Sky Airline, Click Mexicana* (yes, Click)

ASIA: AirAsia, Virgin Blue,* Air Blue (Pakistan, would you believe?), Okay Airways, Go Air, ValuAir, Jetstar Asia*

INDIA AND THE MIDDLE EAST: Air Arabia, Air Deccan, Jet Airways, Kingfisher Airlines (the same folks who bring you the namesake Indian lager), Alliance Airlines,* Air-India Express,* SpiceJet

In keeping with their unorthodox names and identities, a few of these airlines are run by pretty colorful characters. Take Vijay Mallya of Kingfisher Airlines, the brewery tycoon who fancies himself a subcontinental Richard Branson, borrowing the Virgin Atlantic model of stylish decadence for his Indian upstart. Or the feisty Michael O'Leary, leader of the ultra-successful Ryanair, Dublin's answer to Herb Kelleher of Southwest. The now-retired Kelleher rode a Harley, swigged whiskey from a flask, and once challenged a rival to a wrestling match (he lost). O'Leary, for his part, lacks the gimmicky flamboyance, but Ryanair has been racking up publicity points, not to mention passengers, through ludicrously cheap promotional fares and free giveaways of millions of tickets. With or without tongue planted firmly in cheek, O'Leary's stated goal is to do away with airfares entirely, providing gratis travel and making money only through "ancillary revenues," whatever those might be exactly, short of the cabin staff pickpocketing customers and selling off their luggage. Somehow that's a bit like a restaurant claiming it needn't make money from the sale of meals or drinks, but nobody is taking O'Leary lightly.

Here in the United States, travel won't be free anytime soon. In this column on Feb. 24, while lamenting the state of affairs at America's airlines, I prescribed an across-the-board rationalization of ticket prices as an essential step toward industry stabilization. No sooner had I spoken when, late last week, the nation's two biggest LCCs announced fare hikes. That Southwest and JetBlue are upping the cost of travel, however slightly, allows their competitors to do the same, easing the pressure on embattled majors like Delta and Northwest.

This alone, though remedial in the short term, is no guarantee of profitability or even survival. And as prices go up, a certain number of bottom-end passengers are apt to forgo flying entirely, potentially setting up a problem of excess capacity. As you'd expect, carriers carefully analyze the supply-and-demand equation prior to upping fares, but the results aren't easily predictable. A too-high fare structure can begin to breed declining load factors (the percentage of seats filled), touching off a whole new level of unsustainable competition.

More than once over the past couple of years pundits have hailed this or that quarterly earnings statement as evidence of the industry's having at last turned the proverbial corner toward success, but the monster continues to quake and groan. The situation remains shaky. Looming behind every rosy prognostication is the specter of another industry free fall. As we saw on the heels of Sept. 11, the airline business is uniquely susceptible to single-stroke catastrophe. It's bad enough that growing numbers of high-end fliers are migrating to private jet operators -- to fractional ownership programs like that of NetJets, or pay-as-you-go concepts like the one at Sentient Jet. Meanwhile, in a business where up 50 percent of revenues are driven by leisure travel, which is to say a person's or family's disposable income, any economic hiccup or national crisis can have enormous and immediate consequences. For the moment, cautious optimism isn't totally beyond reason: More people are flying than ever before; two U.S. majors have made it through the doldrums of bankruptcy; the bottom-line bleeding, if not entirely stemmed, has at least been slowed. On the other hand, to those prone to view the glass as half empty, the industry's precariousness can't be overestimated. Roughly half of the country's capacity is provided by airlines in or near Chapter 11. Try to picture, for a moment, the effects of a serious recession, or a terrorist strike against an airliner.

Then there's fuel. In this column a week ago, in what could prove to be as gross an understatement as could have been made, fuel was deemed the "wild card" among the industry's competitive variables. For anyone with a vested interest in the airline biz -- and that includes the frequent traveler -- the more one looks at the tensions and uncertainties surrounding global petroleum supplies, the more one quakes in fear. Driven partly by the high consumption rates of growing economies like those of India and China, worldwide demand is beginning to outpace worldwide supply. Should production slow beyond a certain level, as some leading analysts predict will happen soon, energy tabs could increase above and beyond anything we've ever seen. Google the term "peak oil" and behold what plenty of people expect will be nothing less than economic Armageddon.

Last fall, the price of a gallon of jet fuel scooted beyond $2 -- twice what it was only two years earlier. Thus far in 2006, the market rate has been hovering near $1.80, with a barrel of crude going for around $60. Many experts are forecasting $100 a barrel within the next year, and one French investment bank sees costs approaching $400 per barrel within the next decade! According to one estimate, even a 2 percent shortfall in output would bring on a 20 percent rise in cost. Only a week ago, prices jumped $2 per barrel after a thwarted suicide bombing at a Saudi Arabian petroleum facility. Imagine the fallout from a major successful attack.

Next page: The pilot joins the peak-oil worriers