Impact of High Fuel Costs on the Aviation Industry Research Proposal

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¶ … 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… [END OF PREVIEW]

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