Life in the Arctic Ocean

There’s a simple truth about running an airline. Without fuel to put in the tanks, the airplane goes nowhere. Under normal trading conditions, the supply of oil is steady and the price predictable. Unfortunately, instability among the oil producers means prices are volatile. In particular, the potential conflict with Syria has forced a price rise. Should Israel attack and Syria retaliate against tanker traffic, the world would quickly find itself short of fuel. The International Air Transport Association, the trade association representing airlines, has predicted its members will struggle to break even in 2012. Some of the European airlines are looking at record losses with two already insolvent: Spanair based in Barcelona and Malev based in Hungary. The problem is that fuel represents about one third of operating costs. When you add in the cost of servicing the debt on buying the airplanes and paying the staff, there’s very little left. With many tickets sold forward, sudden rises in fuel prices may mean the planes flying at a loss when the passengers actually turn up.

With no sign the international political situation is going to ease any time soon, there are two other factors likely to affect ticket prices. The first is the continuing threat of a double dip recession. Many of the European countries are finding life very difficult and, if economic conditions worsen, people will cut back on non-essential travel. If passenger numbers fall, bankruptcy for more airlines will follow close behind. The only relatively bright prospect on the horizon is the strength of air cargo. It has been steady for the last two years even though the world markets have been trading well below their best. The second issue is the European move to impose a carbon tax on air travel. This is going to drive up ticket prices for anyone flying into or out of Europe, i.e. it’s payable simply because the airplane lands in Europe. With no sign of a global solution to the problem of how to protect the environment, this unilateral tax rise by Europe has angered the rest of the world.

All this means airlines are not going to survive unless two things happen. The first is that peace returns to the oil producing parts of the world. The second is that outside costs like airport fees and carbon tax charges are kept to an absolute minimum. Anything that deters people from flying puts profits are risk. If the unions will not cooperate in reducing the rates of pay, ticket prices must rise. This further drives passengers away and the cycle into insolvency edges closer. The only way we get cheap air tickets back is by seeing an expansion in the number of low-cost discount carriers, and a general return of confidence from customers. Without there being real demand for seats and losses looming, legacy airlines cannot afford to discount seat prices. All that does is make the losses bigger. Lower prices can only come when historical costs are reduced. That’s why so many airlines are trying to cut pension obligations. These legacies from the boom years are a major drag on profits. So, your best hope for cheap air tickets is a victory for the airlines in their battles with unions and government regulators whose job it is to protect pension rights.