As Gas Rises, So Do Airfares
MICHELE NORRIS, host:
We're going to take a closer look now at one industry that's taking a big hit from the high oil and gas prices, the airline industry. The high cost of fuel has contributed to big losses for most carriers, and some pretty big-ticket price increases for travelers.
Richard Aboulafia is an aviation analyst with the Teal Group and he's in the studio with me now. Mr. Aboulafia, how bad has it been?
Mr. RICHARD ABOULAFIA (Aviation analyst at the Teal Group): Pretty darn bad. I mean you're getting toward $75 a barrel. That's trickling down to everybody, especially the consumer. A lot of the long-term planning at airlines has been for something like $50 a barrel, so you can see the difference.
NORRIS: Well one airline that's done okay has actually been able to weather the storm because they did some forward planning. They actually locked in prices, and it protected them. That airline is Southwest Airlines.
Mr. ABOULAFIA: Southwest has done very well with fuel hedges, but of course it's not just one of those smart decisions, they also had a balance sheet that was strong enough to be able to afford fuel hedges. In the case of one other major carrier, Delta, they actually had fuel hedges but they had to sell them to raise cash. Seemed like a good idea at the time.
NORRIS: And just so we understand a fuel hedge means?
Mr. ABOULAFIA: The right to purchase fuel at a specified price in the future.
NORRIS: And so how far ahead were they able to lock that price?
Mr. ABOULAFIA: A couple years, which means they're going to run out in a couple of years. And of course it's diminishing. You know, you hedge, say, 50 percent of your fuel needs one year, 35 percent the next. So gradually, they'll be bearing the brunt just as much as anybody.
NORRIS: And right now that's about as low as you can go in terms of prices, Southwest. So what happens when those prices start to tick up?
Mr. ABOULAFIA: There's no question that ultimately the consumers will be paying more for a ticket price. But this is, to a certain extent, good news. This needs to happen. We need to have a rational industry that charges a real price, not a $39 incredible bargain across the country price.
NORRIS: Well I'm certain that Southwest doesn't believe that this is good news. But why do you believe it's good news for the industry as a whole?
Mr. ABOULAFIA: We'd been getting into some crazy prices. There'd been a long-term slide in revenue and yields and profits. Basically it didn't look like the airlines had any pricing power, the ability to pass on higher costs of fuel to the consumer. They're getting that power. Revenue is looking like it's heading up again, and that's ultimately very good news because this industry needs to be restructured along rational lines.
NORRIS: So some of the bigger carriers, this gives them a bit more leverage?
Mr. ABOULAFIA: Right. Ultimately what they need to do is start passing on the cost of these fuel prices to their customers. And in the past they've been hobbled by, well, the ability to start up and create a new carrier like Jet Blue that would lower pricing for everybody. No one is really doing that anymore. Independence Air was the last gasp with their Chapter 7 extinction, no one really wants to replicate that, so there's fewer crazy new players offering incredible fares. Also, Chapter 11 regulations have changed. And now, you can't just stay in Chapter 11 as a zombie carrier forever suppressing everybody else's pricing.
NORRIS: Anyone who's purchased an airline ticket or has been trying to plan a summer vacation knows that it costs a lot more to fly these days. What's the threshold? At what point, at what price point do people stop flying and just get in the car and drive some place?
Mr. ABOULAFIA: That's the billion dollar question that people would love to know. What is the elasticity of airline demands? In other words, if you raise it by five percent, do you lose what percent of the customers? The big change is that right now you don't have crazy, insane fares that are all over the place. You know, back in the old days, it might cost you $100, it might cost you $1,000 and it was the same seat. Now you've got more of a rational pricing structure, and you can see it on the internet when you go and book your ticket. And as a result, the ability to pass on costs incrementally is probably greater.
NORRIS: Richard Aboulafia is an aviation analyst. He's with the Teal Group. Thanks so much for coming in to talk to us.
Mr. ABOULAFIA: Pleasure.
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