To say the past twelve months have been among the airline industry's most topsy-turvy seems like an understatement. What began last winter with a round of baggage fees escalated into liquidations (Aloha and ATA) in spring and record-breaking fuel prices in summer (around $180 at midsummer). The roller coaster continued in fall with a precipitous drop in fuel prices to around $50 per barrel that just so happened to coincide with one of the steepest recessions in U.S. history.
It's that precipitous drop in fuel prices that's got me thinking today. In a recent column for Salon, Patrick Smith makes a very salient observation, saying, "Only the cost of fuel, which has fallen sharply from its peak last summer, has thus far saved the industry from all-out calamity. Should the downturn worsen—or even if it doesn't— we won't be surprised if one or more major carriers files for bankruptcy before the end of the year."
After reading that, I started to wonder: What if jet fuel were still at $180 per barrel, or even $100? Would cash-strapped carriers like American have long ago tumbled into bankruptcy? Would others be clinging to the edge? Considering the fragile state of the airline industry, it seems almost anything could nudge it toward calamity, to use Smith's term. So where do we go from here? Let's look at the factors in play.
I agree that the recent drop in jet fuel costs probably saved a few carriers, if not the industry in general, from wholesale collapse. The falloff in demand has been so pronounced that even (relatively) healthy airlines like Southwest and Continental would have struggled mightily with fuel prices north of $100, or even $80. Jet fuel is currently sitting at $52 per barrel, and the International Air Travel Association (IATA) says the new average price for 2009 will save the industry $51 billion. American alone stands to save $3.5 billion on fuel this year.
My sense is that $50-per-barrel fuel is essential for the airlines' survival through this recession. If that number goes up again, carriers with weak bottom lines will suffer and struggle to remain solvent. Southwest CEO Gary Kelly thinks prices could climb, so it's something to watch.
Of course, fuel could be free and it wouldn't make a difference if people weren't flying—and people are not flying. The Wall Street Journal recently reported that "demand for air travel is sliding much more quickly and significantly than airlines expected," leaving airlines scrambling. The Journal has more bad news: "Passengers flying in first- and business-class seats—who provide outsize revenue for their relatively small numbers— fell by more than 13 percent in December from a year earlier," while economy travel dipped by 5.3 percent. But, as the Journal points out, the IATA "warned that number probably was inflated 'due to prebooking' when the economy wasn't as stricken."
And as bad as the past few months have been, the outlook is actually worse. According to the IATA, "With job losses accelerating in January and consumer confidence falling further it looks as though even larger declines in air travel should be expected."
The flip side to demand, as always, is supply. And the real problem with plummeting demand is that airlines haven't been able to shrink capacity at the same pace. In fact, the airline industry seems to have been caught off-guard by the severity of the drop, so much that many are now rushing to shed routes. Most airlines came into 2009 with projected capacity cuts to begin with, and two major airlines, Delta and American, have already announced further cuts to take effect later this year. More airlines are likely considering the same.
The reality is that airlines are flying empty aircraft. There are two ways to fix that: Fly fewer aircraft, or entice people to fly (more on this in a minute). Capacity cuts in and of themselves are not bad for the airlines, and are perhaps the surest way for carriers to keep their budgets in line. But it does mean painful job losses and reduced options for anyone still flying.
Fares, Fees, and Frequent Flyers
As to the aforementioned reference to enticing people to fly, let me spare you the suspense: It ain't working. The decline in demand doesn't appear to be slowing anytime soon, no matter how many fare sales the airlines launch (and there have been many). Which begs the question: Assuming airlines can get people onboard, how will they do it if low fares aren't working?
One area to look at is fees. But before you get excited, let me point out that baggage fees in particular have been very successful financially for the airlines and played a major role in keeping them afloat. I doubt they're going anywhere. But as US Airways recently showed, some fees, especially unpopular or truly excessive ones, may be reversible. Would I bet on a wave of overturned fees? No. But it's something to keep an eye on.
Finally, we have frequent flyers, who comprise perhaps the airlines' most dependable customer base, and even they're not flying. Recently, our own Tim Winship has written about a series of mileage discounts, notably from United, on domestic and international travel. As Tim notes, "Such opportunities arise only rarely, in response to extraordinary circumstances, in this case a global economic slump of historic proportions. Take advantage while you can." That's certainly the message United is hoping its customers hear—"buy now!"—and I have to think its something more airlines will try in the near future.
So ... Where Do We Go From Here?
I'll echo my colleague Tim Winship's comment that predicting the industry's demise (or that of a specific carrier) can be a self-fulfilling prophesy. So to answer my own question, where we go from here is forward, but carefully. The good thing about all this recession doom and gloom is that it's created a strong buyer's market, meaning travelers with the means to fly can do so rather cheaply. Should you be afraid to book with a struggling carrier? No. Should you cover yourself in case it goes under? Of course. As consumers and avid travelers dealing with a recession, it's important to spend wisely. This means booking with a credit card whenever possible (so it's easier to get refunded if a provider goes out of business) and monitoring the health of the providers you've booked with.
Hope this is helpful. I'd love to hear what you have to say about the current state of air travel, and any tips you have for navigating the rather, um, cloudy skies ahead. Please leave a comment below with your thoughts. Thanks!