Fly the friendly skies on cheap fuel

Flying in those friendly skies has never been better for the corporate airlines. As for the cattle that is herded into the pens, the exhilaration and excitement has long faded into storm clouds. No doubt that in a competitive economy, enterprises must make a profit to survive, much less prosper. The airline industry does not have the same romance of a Yankee Clipper flight to China, but the amenities of sacking out in style certainly improves the hardship of travel. So what about the economics of the air passenger sector? A CNN reports says it all Airlines saved $11 billion on fuel. You saved 8 bucks.

USA Today sums up the obvious, Airlines fly lower fuel costs to lofty profits.

“Three more airlines – United, Southwest and Alaska – Thursday reported big profits for the fourth quarter, largely thanks to lower fuel prices.

Cheap fuel has allowed the airlines to reward shareholders with stock buybacks and dividends, and to thank workers with profit-sharing. They’re also buying planes to update their fleets.”

Wow, this must be good. Making money is what it is all about in a capitalist system, RIGHT? So how can a comparison of cost for the benefits be understood? A site Rome2rio has a very useful chart, Airline fare analysis: comparing cost per mile. A range of three cents per mile to a high of twenty-seven cents indicates that not all flight patterns are equal.

Based upon the experience back on home turf an Analysis: Consolidation of U.S. Airline Industry Radically Reducing Competition documents what most people have long expected.

“At 40 of the 100 largest U.S. airports, a single airline controls a majority of the market, as measured by the number of seats for sale, up from 34 airports a decade earlier. At 93 of the top 100, one or two airlines control a majority of the seats, an increase from 78 airports, according to AP’s analysis of data from Diio, an airline-schedule tracking service.

Overall, domestic fares climbed 5 percent over the past 10 years, after adjusting for inflation. And that doesn’t include the $25 checked bag fee and other add-on charges that many fliers now pay.”

A crucial aspect when looking at the commercial airline industry must recognize that most travel by air is discretionary. Business appointments can often use online conferencing as an alternative. Metropolitan residents, who do not own a motor vehicle, use public transport. So when an opportunity arises to take a red eye to the coast to stay at the Hotel California, Glenn Frey won’t be sitting next to you.

A scholarly paper on the Importance of Aviation Industry states:

Aviation is the United States of America’s dominant mode of transportation of goods and services. All activities implicated in the provision and exercise of aviation is imperative to the nation’s economy. The aviation industry’s contribution to Gross Domestic Product is 4.7% on an average. Aviation associated economic activity accumulates to $975.7 annually and for each dollar delivered to final demand by the aviation industry, an additional $1.87 in output (economic activity) is generated, for an overall multiplier of 2.87.

Such an observation provides evidence that the monetary contributions stemming from the flyover streams of cargo and people are crucial to the economy. From a financial investment perspective Zack ask, Are Airline Stocks Cyclical? Their answer: “The industry is very competitive because several airline companies, including discount carriers, often operate on the same routes. This means that the airlines do not have the flexibility to raise prices either to cover increased costs or expand margins.”

No doubt pricing pressure to lower margins has cursed the industry since Airline Deregulation. In the good old days, upstarts did not institute price discounts as such legendry carriers like People Express made infamous.

With the inevitable bankruptcies that took place over the decades, the rush to merge has produced, The runway to the final four. Note that the only companies that did not go bust at some point were the low cost providers, with the flagship Southwest leading the way.

Cheap fuel and inexpensive interest rates on financing will not last forever. From the financial side, the airlines will have to go along with the ride, as do the rest of us. However, from the fuel cost standpoint, the industry should take a very hard look at Jet Fuel from Algae.

“We are not claiming some Rumplestiltskinesque hay-into-gold finding—but rather a first step worth exploring. We took a closer look at a certain type of algae, which contain a class of fascinating and overlooked chemical compounds that most algae do not have. In a study published Jan. 26, 2015, in the American Chemical Society’s journal Energy & Fuels, we reported on a process to transform these compounds into components used in jet fuel.”

Cited by All About Algae are the following companies who are developing a sensible alternative source to power the engines of flight.

A number of companies are working on developing biojet fuel from algae, including: Sapphire Energy; Heliae, Phycal, Cellana, Solazyme and General Atomics, just to name a few.

All this research is beneficial to the industry, but will the public share in the lower operation costs? From the recent record of fare pricing, it seems likely the carriers will charge whatever they can get away with.

This style of Corporatocracy is a little different from the most monopolistic segments of the economy. If only consumers could have that same discretion to buy a ticket or stay at home, when the likes of the electric utilities, fiduciaries sectors and the food processor conglomerates; come into play.

Airline travel is quick, still relatively cheap and certainly as safe as it gets. The same cannot be said for the terminal security procedures from the TSA Nightmare Stories. A significant reason that ticket charges are higher than they should be comes from government intrusion in the travel experience. Terror in the skies comes more from the madness on the ground, then in the air.

Source: BATR | Image:  ERIC SALARD/Flickr