Flight Blog

Mar 13 2008 State of the Industry BY sgf-adminTAGS Airlines

 

The last couple of weeks have certainly been interesting in the airline industry; not so much for what has happened, but for what hasn’t happened.

 

A month ago the industry grapevine burned up with rumor after rumor about a possible merger between Delta and Northwest Airlines. Merger talks reportedly were going full steam until it came time to get buy in from the pilots union. That’s when things came to a grinding halt (at least that’s the way it appears to be). Now, it’s dead quite.

 

Meanwhile the price of oil continues climbing. Yesterday it reached $110 a barrel. This week the average price of jet fuel is $3.10 a gallon. That’s up more than 60 percent in the past year.

 

At some point fuel prices will force the airlines to start cutting flights. But when? It’s a tricky question to answer because the flying public continues to fly despite higher fares; the airlines reported robust February passenger numbers. At what point will customers balk at the higher fares? And then there's fuel hedging. The practice gives the airlines some breathing room, but for how long?

 

Here's an interesting story from Reuters about airline fuel hedging. Stay tuned…


 

The posting on Spirit Airlines has evolved into a conversation about Branson and air service. You may want to catch-up before reading on...

 

Mike has several questions:

 

"Well, what data did the developers of the new Branson Airport currently under construction use that justify a multi-million dollar airport for the city? Are they using the build it and they will come strategy? I don't think they had only charter service in mind. Based on how many people visit Branson when they get a carrier I think it will open itself to the entire country as a destination market. What would you do if one of the big carriers into Springfield pulled out and went to the new Branson Airport? Or, what could happen if an airline like US Airways decides to fly to Branson and use a big jet like a 737 that could also mean cheaper ticket prices compared to flying into Springfield?"

 

Mike...I can't speak for the Branson airport developers. You'll need to ask them what data they used. You wonder what the Springfield airport would do if a big carrier pulled out and went to Branson?  That's not going to happen.

 

As for your question about US Airways... It's hard for me to imagine how this implausible scenario would mean cheaper ticket prices compared to Springfield. That's not how the industry works. Absent external forces (which I'll get to in a moment), air service and the price of tickets is largely determined by supply and demand: prices are cheaper in large markets and more expensive in small markets. Low-cost carriers (LCCs) are not going to consider daily service into any market that doesn't guarantee them roughly 238,000 enplanements (people getting on an airplane) a year. That's how many bodies just one LCC would want. And then they would provide service to just one destination.

 

Now what about those external forces? Here's an example. Over the years ski resort towns in Colorado have done different things to gin up air service. For example, local businesses have pooled money that is offered to airlines for service. They might say to the airline, "If you provide us this service, we'll guarantee your revenue: if the plane isn't 70 percent full, we'll pay you for the empty seats." The hope is that the service will grow strong enough that it doesn't have to be subsidized. This approach is fraught with problems, including 1) the service often doesn't grow and businesses grow weary of paying the subsidy, and 2) the airline demands more money. There are dozens of other issues I could raise here and you probably have at least as many follow-up questions. So, I'll close with this...

 

The Branson project faces several challenges, the least of which is the volatility of the commercial airline business. Since 9/11 the airlines have been running by the skin of their teeth. Profit margins are slim. Bankruptcy is common. High fuel prices and labor unrest are constant worries. The expansion of routes, or the addition of new service, is done with extreme caution. Given this business climate, getting an airline to jump into an unproven market will be a tough nut to crack. And before airlines could be persuaded to jump in, there would have to be proof positive that hundreds of thousands of people across the country are willing to pay air fare to Branson.

 

Don’t get me wrong. It is not my intent to cast dispersions on the Branson airport. We wish the Branson project good luck and best wishes. I'm just saying they face some HUGE challenges. If the developers can pull it off, they deserve our applause.


Feb 29 2008 Economic Downturn Affecting Airport? BY sgf-adminTAGS Misc.

 

Cliff wonders:

 

"Has the airport noticed a decline in travelers since the recent economic problems. I wonder what effect this downturn will have on not only the airline industry but our airport as well. I fear we may lose service to some cities." We haven't had a decline—yet. In fact, passenger numbers were up in January by five percent. If we're going to see a decline in passenger numbers, it probably won't happen for another month or two. That's because a lot of people flying right now booked their flights weeks, or even several months ago.

 

As for your concerns about losing service, there is that possibility. We'll be doing well this year if we get by without any service cuts. See previous discussions on this topic by clicking here and here.