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


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Patrick Smith
March 3, 2006 5:29PM (UTC)

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)

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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.

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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.

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Apart from the consumption crunch, a slew of unstable, highly unpredictable forces are at play in some of the world's most important oil-producing regions: fighting in Iraq, unrest in Nigeria, the dangerous posturing of Iran. A calamitous surge in prices needs only one gunshot, with several itchy fingers already scrabbling at the trigger.

Fuel bills are already dragging heretofore-successful airlines into the red. JetBlue's fourth-quarter 2005 deficit can be blamed almost exclusively on fuel. So far, Southwest Airlines is the only major player to stay ahead of the curve, doing so through a remarkably prescient hedging program. Buying kerosene at set prices up to three years in advance has kept Southwest out of trouble (and is arguably responsible for holding down the average price of a ticket more than any other single factor). The Texans haven't been the only airline to hedge, but they've had the resources and foresight to be the most successful at it. (In 2004, Delta was forced to sell off its hedge positions during a cash crunch, a move that proved disastrous once prices began to soar.) Once Southwest's hedges begin to run out, the playing field should become much more level.

As I mentioned last time, there are few, if any, large-scale efforts under way to power commercial aircraft by alternative fuels. That may or may not change in time -- see the Go-Arounds at the end of this article for why it might not be such a useful idea in the first place -- but without a massive push on the scale of the Manhattan Project, we're talking years of research. Either way, for carriers on the brink of oblivion, the future is now.

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As an integral part of the national and global economies, air travel will be with us forever. A certain number of people and a certain amount of goods will continue to travel by air, even as the price of doing so soars. But a certain number will not. Subtract 10, 15, or 30 percent of the passengers from the nation's aircraft, and suddenly supply far outstrips demand; pricing power collapses and only a fit few survive. I hate to say it, but the great shakeout predicted four years ago, now widely regarded as excessive hyperbole in the wake of Sept. 11, may still be in the cards -- inspired not by the schemings of Osama bin Laden, but by the mullahs in Tehran, strife on the streets of Baghdad, our own bad habits and national shortsightedness.

GO-AROUNDS

Re: Fuels and fools

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Not to put a damper on the whole hydrogen thing, but even if planes (or cars for that matter) were converted to hydrogen, they would still be relying on fossil fuels. Almost all commercial hydrogen is produced from oil. While Iceland is currently working to become the first hydrogen-based economy, they have enormous geothermal energy sources to produce the hydrogen from seawater. The rest of the world does not have this luxury. Thus, changing from kerosene to hydrogen would be trading one fossil fuel derivative for another. The change would likely cut down on carbon emissions from cars, but I think the net effect for aircraft would be negligible given their excellent efficiency. The cynic in me believes our dear president wouldn't be so hot for hydrogen if it really meant ending the use of oil.

-- Stephen R. Stapleton

Author's note: Others think/fear that coal, not oil, will be the fuel used to generate large-scale stores of hydrogen. Stapleton's point is valid either way.

I am a 13-year-old fan who enjoys your writing, but your last column contains a slight error: You wrote: "Of those [airlines] just mentioned, only AirTran features more than one aircraft type in its fleet." This statement is incorrect. JetBlue flies two completely separate aircraft types, built by different manufacturers -- the Airbus A320, and Embraer ERJ-190.

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-- Alex Block

Author's note: Youngster Block is correct. I have no excuse, as I'd been watching one of JetBlue's newly introduced Embraers flying overhead on the same day I completed that column.

Re: Piloting perils

You missed one point in an otherwise great article pertaining to those of us who learned to fly on Uncle Sam's nickel: the possibility of washing out. No one should doubt that a commercial airline pilot is safe to fly passengers routinely, but the civilian can be very flexible as to when and how he or she trains, up to actually selecting your own flight instructor. A military pilot has to face washing out in any phase of training, and has to learn on someone else's schedule, where there's a constant element of competition and winnowing. I'm not saying either kind of pilot is better -- at a certain level, the overall professionalism and competence is the same. But military pilots pay for their training with an elevated level of professional risk that civilian pilots simply don't face.

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-- Mitchell Burnside Clapp, Maj., USAFR, U.S. Air Force Test Pilot School

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Do you have questions for Salon's aviation expert? Send them to AskThePilot and look for answers in a future column.


Patrick Smith

Patrick Smith is an airline pilot.

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