The impact of high fuel costs on the aviation industry

¶ … High Fuel Costs on the Aviation Industry

Rising Fuel Prices: a global problem on the ground and in the air.

The rising costs of fuel today has become a global crisis for both industries and households. Being heavily dependent upon fuel for its continuing operations, airlines have been heavily burdened by such fuel prices. Indeed, some have gone to extreme measures such as laying of thousands of workers and delaying or eliminating long-distance flights. In addition, the general aviation industry has also suffered, along with the service providers associated with it. Recreational flyers have reported spending much less time in the air, for example. Solutions suggested in this regard revolve around alternative lead-free fuel. This has however not been conclusively investigated. Not being a simple issue, it is a highly contested one that could lead to further market instability.

Introduction

The rising costs of fuel has become the main conversation point of motorists throughout the world. For perhaps the first time in world history, the food and fuel crises have become worldwide phenomena, with only an investment in alternative fuel sources appearing to be a valid long-term response. The aviation industry is no exception, and indeed appears to be one of the hardest hit industries in terms of fuel. Both commercial and private airlines need a large amount of fuel in order to complete their long- and short-distance flights. The rising fuel costs have resulted in a number of strategies to mitigate the extra investment required. Some commercial airlines have even reduced their long-distance flights in order to save fuel, while others have increased their ticket costs. The reality is that fuel prices are likely to continue their upward trend as the world's oil resources are increasingly pressured.

Commercial Aviation

The American commercial airline industry is facing an extreme crisis in terms of the fuel prices. Many face bankruptcy by as soon as the end of 2008, according to some authors. Indeed, the stock market trend for the aviation industry appears to substantiate such dark predictions: Northwest shares falling by 3.3% and the Amex Airline Index down by 1.5% (Peer, 2008).

Alexandra Marks (2008) paints an even gloomier picture, noting that the entire aviation system in the United States could face collapse by the beginning of 2009. Indeed, as indicated above, the consumer experience in flight has suffered so greatly that potential passengers are often opting for another method of travel if they possibly can, in order to avoid the perceived inconvenience of high costs and other cost-cutting methods by airlines. Concomitantly, the airline industry has become a losing investment. According to the author, the main effect of the rising oil and fuel costs have resulted in major airlines losing millions of dollars during each quarter. This trend will not continue for very long until every major airline faces bankruptcy, according to warnings by the chairman of American Airlines, Robert Crandall.

And indeed, the crisis is very real. It is expect that, if high oil prices persist, most major airlines will run out of their cash reserves by the end of 2008 or the beginning of 2009. Indeed, it is expected that by this time, an estimated 100 regional and 50 major airports throughout the country will lose a large amount or even all of their air service. This has led to widescale retrenching practices, as seen above. In total, an estimated 25,000 airline employees are expected to lose their jobs, with hundreds of planes parked and flights reduced in large amounts.

To quantify the problem, Marks (2008) cites the Air Transport Association in their finding that fuel costs have moved from the second-largest operating expense for airlines to their top expense, with personnel costs moving from first to second place in this hierarchy. Indeed, fuel costs now comprise between 30 to as high as 50% of an airline's budget. A concomitant problem is that current fuel prices cannot be mitigated for several reasons. Most tickets are for example sold in advance, and cannot be used in order to offset high fuel costs, as they were sold before the increase in oil prices. Another factor is that higher ticket prices may discourage business and also increase competition from low-cost airlines such as Southwest.

Meanwhile, airlines have made several adjustments in order to help keep their ticket prices affordable (Peer, 2008). One example is U.S. Airways Group, who recently announced its planned removal of in-flight entertainment systems on domestic flights by November 2008. These systems add to the weight of aircraft, and therefore to their fuel consumption. While international flights will still feature the entertainment systems, some 200 aircraft on domestic flights will no longer include these for passengers, although plans are in place for lighter systems to be implemented later.

Strategies to mitigate fuel prices also have a more direct effect both on passenger and airline employees. Passengers are for example charged for services that have been complementary to date. These include baggage checks and in-flight meals and drinks. In addition, jobs and employee benefits have been slashed, with Northwest Airlines cutting 2,500 jobs, charging $15 for checking luggage, and a fee of $25 to $100 for redeeming frequent-flier awards. American Airlines introduced the practice of charging fees for bag checking, which was followed by U.S. Airways and UAL. Frequent flier fees are also charged by American and Delta, while U.S. Airways is first in removing their in-flight entertainment systems (Peer, 2008).

Eliminating long-distance Flights

According to Daniel Michaels (2008), long-distance flights are suffering not only from eliminating in-flight entertainment, but are also being eliminated altogether. This is not only true of planned new flights to China and Russia, but also existing, longer flights. The author notes that new aircraft purchased by Airbus and Boeing Co. can provide passengers with nonstop flights of 18 hours or more on routes such as those between Singapore and New York. However, long-distance flights are vulnerable to high fuel prices as a result of diminishing passenger numbers.

In the light of fuel increases, airlines such as U.S. Airways Group Inc. have been forced to delay the launch of new flights such as a 13-hour daily flight from Philadelphia to Beijing, with Northwest Airlines also applying for permission to suspend its seven weekly cargo flights between the United States and China. United Airlines also postponed by five months its launch of a flight between Washington and Moscow.

The author cites a combination of physics and economics as the reason for the necessitated delays and vulnerability of long-distance flights. Michaels (2008) points out that the airfare per mile does not rise in proportion to the fuel usage per mile of a longer flight. In other words, more fuel costs are incurred by longer trips than are mitigated by airfares. The difference is easily absorbed when traffic is strong and fuel prices are low. In the current climate, however, this is not the case.

A further reality is that the projected value of extra long flights have failed to live up to expectations. Indeed, as mentioned, many airlines were forced to terminate or postpone long flights in response to the rising fuel prices. This is not only so within the United States, but also internationally. Thai International for example is planning to terminate the 17-hour flight it offered from Bangkok to New York. This flight was launched in 2005.

Michaels explains that, in terms of physics, a long-haul flight could cost as much as double the price of flying the same route while stopping three times to refuel. The reason for this is the weight of fuel. In order to fly 18 hours in one long trip means that a large amount of fuel has to fly wit the aircraft. This increases the weight of the craft and hence the fuel consumption. Such weight has a heavy impact on fuel consumption, particularly with fuel prices being as high as they currently are. The problem is exacerbated by a concomitant lack of passengers.

Nevertheless, some airline businesses maintain that longer non-stop routes can be profitable and economical. Airbus maintains that demand for these will continue, but also acknowledges that the increases in fuel costs could be to the detriment of this. Furthermore, an attempt by Boeing and Airbus to sell several long-haul carriers has proved to be unprofitable and unappealing to the market. Despite Boeing's argument to the contrary, it appears that fuel prices are simply not as efficient for long-haul trips as for trips where several stops are included.

Lowering Oil Prices: the solution?

As seen above, there have been a number of strategies by aviation companies in response to the fuel crisis. In addition to raising and adding costs for services, some airlines have for example urged their customers to ask Congress for a curb in speculation, which would supposedly lead to a reduction in fuel costs (Peer, 2008). Many airlines, including U.S. Airways Group, AMR, Delta, and Northwest Airlines have joined their voices in blaming Congress for their rampant speculation practices leading to the global crisis. According to these airlines, the public can help by contacting their Congress people.

According to the airlines in question, there are in fact (or have been) regulations in place in order to discourage the phenomenon of uncontrolled speculation and manipulation in world markets. These have however been weakened or removed, resulting in the rapid rise of fuel prices today. The claim is in fact that rising demand and diminishing supply cannot account for the rise in oil prices that have been experienced over the last year.

Alexandra Marks (2008) also addresses the role of the Government in encouraging higher fuel prices. According to airline industry experts and analysts, Congress is not doing enough to curb speculation. If this is not done very soon, according to these experts, the aviation industry could face a collapse in the not very far future, that is in danger of crippling the economy of the country. Marks further states that, in addition to encouraging the public to do the same, airline officials themselves have also contacted Congress in an attempt to encourage less speculation and lower fuel costs. Some believe that the Government is beginning to see the benefits of curbing speculation, while others maintain a somewhat desperate paradigm.

Many airlines therefore feel that lowering fuel prices via a curb in speculation will mitigate the crisis and provide airlines with the necessary platform on the basis of which to recover. Others however hold that this is not a viable solution in the light of the extent of the crisis. Indeed, according to Marks (2008), some analysts do not believe the claim regarding speculation to be the only or even the primary reason for climbing prices. These analysts cite issues such as demand and supply problems resulting from the economies of China and India in concomitance with political violence in Nigeria. These more direct influences on oil prices are seen to be more influential than speculation alone.

Analysts with these opinions hold that the industry will have to shrink in response if oil prices remain at their current levels. Indeed, in order to ensure that passengers can still use airlines for all their travel needs, it is projected that government help will be essential in providing assistance during such a shrinking process (Marks, 2008).

Additional Problems that impact Prices

Marks (2008) also focuses on other problems besides the fuel crisis that plague the industry. In addition to these, there are problems such as delays and a lack of service. The losses currently suffered by the industry can therefore, according to the author, not only be blamed upon government action and fuel prices. Instead, Marks notes that the industry could do much more to encourage additional passengers. High ticket and service prices could for example be mitigated for passengers by providing a higher quality of service during flights, and by ensuring that flights are not delayed as frequently. Indeed, many airlines are losing passengers not only as a result of high ticket costs, but also as a result of these additional problems. If these are eliminated, losses suffered as a result of fuel could be significantly reduced.

Marks then suggests that the government needs to take a much more active part in providing a national transportation policy in order to save the failing infrastructure.

But the major airlines are opposed to any form of regulation, claiming that deregulation has been beneficial for passengers in terms of competition and lower fares.

Some analysts are in agreement, citing the success of low-cost carriers such as Southwest Airlines to substantiate their claims. They suggest that better airline and air-traffic control system management would go a long way towards improving service delivery to passengers and also to maintain relatively acceptable costs. These analysts argue that government regulation would drive ticket prices even higher than fuel costs. In addition, it is feared that regulation would result in higher costs, but a concomitantly even less efficient aviation system. This would not solve any of the industry's problems (Marks, 2008).

Craft Efficiency

Brian Strauss (2008) reports an entirely different angle on the rising fuel and oil costs for the airline industry. The author cites Boeing in saying that the demand for new aircraft to replace old, less efficient craft will be in high demand during the coming years. Indeed, Boeing appears to be more positive about the rising fuel costs than many other service providers, maintaining that the regional demand would be balanced, although it is projected that 29,400 new passenger and freighter aircraft will be needed by 2027.

Spokespeople from Boeing maintain that the long-term outlook for the commercial airline industry is much more positive than projected by many of the industry leaders mentioned above. While Boeing recognize the realities of the industry today, company leaders are also considering global demands over the long-term. It is projected that both passengers and freight will increase (by 5% and 5.8% respectively) rather than decrease annually. The company holds that these increases will generally be driven by better and newer aircraft to replace the old. Hence the company is focused upon long-term solutions rather than what they view as the short-term problems presented by rising fuel costs.

Measures Going too Far?

In the desperate effort of airlines to cut fuel costs, some critics have become concerned that many of these measures have become excessively extreme and may have a detrimental impact upon flight and passenger safety. Jason Whitely (2008) mentions the example of American Airlines. Specifically, the airline has started implemented measures by which to conserve fuel when filling the aircraft up for their domestic flights. While the airline maintains that it would still be within FAA guidelines for sufficient reserve fuel, it would not say by how much fuel amounts would be cut. This has led to worries not only regarding safety, but also regarding eventualities such as bad weather and delays. Such elements need to be calculated along with normal fuel usage.

While flight dispatchers and pilots have the final say in fueling practices, some feel that economics might soon play a bigger role than safety in ensuring fuel efficiency. Indeed, this seems to be the case at American Airlines, where managers have gone as far as emailing a memo to employees, indicating a certain amount of fuel for filling up the tank. If this memo was not complied with, employees were threatened with a hearing. Dispatchers in particular noted that they felt intimidated.

While commercial aviation companies have made several efforts to cut costs and save on fuel, General, smaller-scale Aviation operations have also suffered as a result.

General Aviation

Roxana Hegeman (2008) notes that the general aviation industry includes recreational and private charter flights. Not only these are suffering as a result of higher fuel costs, but also the industries that cater to such operations. Examples include piston-powered aircraft makers, pilot training schools, fixed base operators, among others.

According to the author, Cessna Aircraft Co. offers a program that includes free fuel for up to 18 months as a reward for buying Cessna 182 Skylanes or turbo Skylanes. This translates to up to $15,000 of fuel costs per sale.

Interestingly, a drop in shipments of piston-power aircraft of 28% occurred concomitantly with a rise of 41% in shipments of business jets for the same period. The author notes that this is the result of international shipments, particularly to emerging business flight markets such as India, Asia and Russia.

Recreational flyers are however using their aircraft much less than was the case in the past, even when attending gatherings that cater specifically to their market. According to a survey of the Aircraft Owners and Pilots Association, 72% of its members report flying less than they did in the previous year, and 61% of these do so as a result of fuel prices. Furthermore, flyers in the recreational field alone have reported a greater decline in flight time than those who fly for business purposes.

Hegeman (2008) reports that fuel prices for aviation have increased an average of 24% nationwide. The result is that recreational flyers tend to use their aircraft less. However, it is also reported that private business jets have not been impacted, as their owners could better afford fuel prices.

Hegeman focuses her report on Wichita, where roughly half of the pilots are leisure flyers. She cites Alyson Elder, a flight instructor, in saying that rising fuel prices will result in fewer people having the funding and ability to learn to fly. She projects that this could lead to a future shortage of pilots in the general aviation industry.

In addition to rising fuel prices, the cost of a pilot's license has also doubled over the last two years, with the price of aircraft rental also raising concomitantly with fuel prices. Hence, recreational pilots particularly find it difficult to maintain their hobby, while business pilots also see a loss in their average income.

In addition to rising fuel costs, new proposals for alternative aviation fuels have begun to create uncertainty, particularly in the general aviation market, as reported by Kerry Lynch (2008).

Alternative Fuels

Lynch notes that the EPA has received a petition from the Friends of the Earth environmental group to study the impact of general aviation fuels on health and the environment, and a concomitant suggestion for new emissions standards. The Aircraft Owners and Pilots Associations has however warned that extreme caution should be exercised in this regard. Imposing further restriction in an already stressed market could prove dangerous to the extreme not only in terms of the economy, but also in terms of flight safety.

According to Lynch (2008), 30% of the existing piston-powered aircraft in the United States can only operate safety on fuel with an octane rating of at least 100LL. Although in the minority, these aircraft operate at the highest performance of the fleet, and it would be fatal to the market to impose further restrictions upon these.

While the necessity of research in this regard is acknowledged, the author also notes that the technical difficulties involved should not be overlooked to the detriment of pilot and passenger safety. The author cites the AOPA in stating that no simple alternative exists, and that a simple solution should therefore not be expected. One example is the ethanol that is increasingly used by producers of automotive gasoline. While some aircraft have been approved for such gasoline, ethanol could prove dangerous to the aircraft. The corrosion effects of ethanol on aircraft parts is one of the factors involved in making it very difficult for general aircraft to operate on automotive fuel.

Another technical difficulty is making structural and mechanical changes to aircraft in order to accommodate the introduction of a new fuel type. The requirement of FAA approval for such changes in design is one of the elements that has proved time consuming and uneconomical in this regard. Furthermore, Lynch (2008) notes that a requirement is also producing an alternative fuel that can be used universally for all aircraft, as aviation gasoline is a low volume, specialty substance and producers would be unwilling or unable to provide more than one kind.

While there is currently no viable, practical alternative for 100LL aviation fuel, Lynch cites the AOPA in emphasizing that the FAA should lead investigations and efforts towards manufacturing alternative aviation fuels, as it is primarily responsible for flight safety. And indeed, the author notes that the FAA is planning to study the impact of aviation upon the environment.

A further encouraging sign cited by Lynch is that the use of leaded fuel is continuing to decline, and currently stands at only about half of what it was previously, despite the technical and manufacturing difficulties involved. However, the safety and public interest issues involved makes alternative aviation fuel a currently unviable option for large-scale implementation. Instead, the author cites RACCA in a statement that attention can also be paid to other areas of world pollution that should not be ignored in favor of a very expensive and labor-intensive cause like aviation fuel.