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The Future of Air Travel

Written By Brian Hicks

Posted May 28, 2008

Short the airlines. “No airline can make money at $123-a-barrel oil,” says Southwest CEO Gary Kelly.

Last summer, before the fuel price run, we were okay with flight ticket prices. Airfare, at the time, was compatible with budgets. And all was okay for airlines, showing signs of life with profitable quarters.

Then the price of fuel went nuts, running to $132+.

Nowadays Northwest has plans to raise fuel surcharges by $10, matching the rise at Delta Air, United Airlines, American Airlines and Continental Airlines.

Can you imagine what’ll happen to airlines when oil hits $200? It won’t be pretty.

It’ll only get worse.

According to Business Week, airlines may spend up to $60 billion on jet fuel this year alone, or about four times what they paid in 2000.  “Because of the spike in fuel costs, airlines now lose roughly $60 on every round-trip passenger, a slow bleed that puts the industry on pace to lose $7.2 billion this year, the largest yearly loss ever.”

Eventually, we’ll see further airline consolidation.  We’ll see fewer airlines, forcing the survivors to alter the way they operate.  “The problem right now is that no one knows where the price of oil is going to fall down,” according to the Business Week article.  “Right now you’re just in kind of the worst of all possible situations. Your planning becomes ‘What do we do to lose the least amount of money?'”

“Experts also believe that the oil crisis will eventually prompt Washington policymakers to drop their long-standing resistance to foreign ownership of U.S. carriers, leading to the first generation of truly global carriers.  “The U.S. airlines badly need more capital to survive, and the only players with the resources to buy in are the (cash-rich) European carriers. Why would Congress object to that?”

For now, until we see a substantial drop in oil prices, continue shorting the airlines.