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Goodbye To Cheap Air travel

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Popeye Express

Shares in British Airways rose sharply this morning after preliminary results for the 12 months to March revealed annual pre-tax profits up by 44.5% to £883 million. These excellent figures are bucking the trend in airlines around the world, and particularly in the US, where the airline sector as a whole posted an $11 billion loss in the first quarter of this year. BA warns that the next year will be “challenging”, in the light of continuing economic slowdown and oil prices showing no sign of a significant retreat below the $125 a barrel mark. The airline expects its fuel costs for the past year to have been more than £2 billion, around a quarter of its cost base, rising to £2.5 billion in the coming year.

In the last 90 days, jet fuel prices have jumped 38%. As oil has hit record high after record high, fuel costs have exceeded labour costs for many airlines, accounting for as much as 40% of operating expenses. Airlines can’t set their ticket prices high enough to keep their businesses in the air. According to Delta CEO Richard Anderson, ticket prices would have to rise 15-20% just to cover increased fuel costs. Of 769 million passengers on US flights last year, many are thought to be on non-essential trips which will be cut back as times get harder.

The budget carriers’ business models have always relied on the thinnest of margins, and fuel price rises have so far caused eight airlines to go under, with more tipped to follow. One of them, ATA Airlines, left US soldiers stranded in Iraq, unable to get home to Vermont as the company went bankrupt.

The larger carriers have responded to mounting fuel costs by eating into their cash reserves to keep prices artificially low. At its current spend of $3.3 million a day, American Airlines could have spent its $5 billion cash reserves, the largest in the industry, in four years. There’s only limited scope for cutting costs by tricks such as economising on maintenance, taking safety risks like flying with inadequate fuel reserves, and skimping on customer service. Carriers are hoping that mergers will ensure their survival, at least for a while. Northwest Airlines and Delta have a proposed merger under review, with United Airlines thought to be in talks with both Continental Airlines and US Airways.

Cheap air travel is almost certainly doomed. Depending on how you feel about flying, that may or may not be the downside. The upside is that rail travel is bound to gain market share in the years ahead. Rail is the cheapest and most fuel-efficient form of transport, using a third less fuel than air for personal travel, and as little as 3% of the energy for freight. Rail companies have recently been attracting substantial investments from some of the wealthiest US investors:

These are all freight companies, the North American passenger business having withered in the face of cheap, aggressively-marketed air travel, but there is good reason to expect that passenger services will follow growth in freight traffic. In their book ‘Transport Revolutions: Moving People & Freight Without Oil’, Richard Gilbert and Anthony Perl predict that in 2025, no more than 25 airports will be operating. Electric powered transportation and rail will be the standard transport options. In a post-peak oil world, rail is probably the longest safe bet one could possibly make.

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Written by Pete Smith

May 16, 2008 at 12:31 pm