The Airline Crisis Deepens

Jun 28th, 2008 | Posted by

Persistently high fuel prices are worsening the crisis facing US airlines. The New York Times reports carriers are going to slash 10% of their flights this fall:

With more reductions coming next year, all the domestic industry’s growth over the last decade will most likely be lost. “The U.S. industry is undertaking a historic restructuring,” Gary Chase, an industry analyst with Lehman Brothers, wrote in a research report Friday.

Air fares, which are up about 17 percent this year on average, may rise as much as 40 percent within the next four years, Mr. Chase predicted.

The NYT article focuses on smaller towns that are being cut out of the US air network, including San Luis Obispo. The article might make it sound like it’s just the small fish being hurt. But an LA Times article on the impact of $200/bbl oil, which we are fast approaching, notes that the LA-SF route is in for cuts:

Travelers can also expect much fuller and much more expensive airplanes — when flights are available at all. Delta Air Lines Inc., for example, recently said it was cutting about 13% of its flights from Los Angeles International Airport to save fuel.

It also could mean shifting flights from outlying airports such as Ontario to LAX to cut overhead costs, said Jack Kyser, chief economist for the Los Angeles County Economic Development Corp. Carriers probably would also trim flights in highly competitive air corridors such as L.A. to the Bay Area.

Unfortunately the LA Times article totally neglects to mention high speed rail and Prop 1 as the solution to that crisis – but that is indeed the answer. The era of cheap oil is over for good, and it’s time we looked to long-term solutions that provide clean, sustainable transportation free from the vagaries of oil prices. High speed rail is necessary if Californians are going to get around their state, if our economy is going to have a shot at competing in the globalized 21st century.

We’re not the only ones seeing this. Southwest Airlines has stayed afloat this long only through the use of complex fuel hedges, which will expire within a few years. Recognizing the problem their CEO, Herb Kelleher, had this to say last month:

Herb Kelleher, the iconic co-founder of Southwest Airlines who stepped down as chairman Wednesday, said flying could become something that only business travelers or the affluent can afford, much as it was in the 1950s and ’60s.

“You may see a lot less air service across the United States, and that’s really a shame,” Kelleher said. “We are heading back in that direction.”

HSR is our only chance to provide affordable, frequent, high capacity intercity travel for California.

  1. Brandon M. Farley
    Jun 28th, 2008 at 08:47
    #1

    In my opinion, I don’t feel HSR should be mentioned as a solution to high oil and gas prices and airline woes, or any of the other today’s pressing and immediate challenges; fiscal or environmental.

    My consternation has to do with hanging ones hat on those ills to support HSR, AND the what-if scenario; however improbable, that someone will come out in the 11th hour and claimed to have solved those ills.

    Or, that it’s too much of a leap of faith for some to connect airline cost woes with other alternative modes. After-all, many people also do not fly to begin with b/c they are priced out of it from the start. They will not care in the one way or the other. But, I’ll admit, they probably are not reading the NYT too.

    No, I think support for HSR should rely on ills that we know will be out there in the future… energy independence, green house gas reductions, more fiscally responsible than alternatives (airports & roadways), etc.

  2. Robert Cruickshank
    Jun 28th, 2008 at 08:53
    #2

    I don’t see it that way – many people use airlines to fly within the state. To visit family at the holidays, to go to a graduation in May, for a weekend vacation in Napa or San Diego. Air travel is a backbone of California’s transportation system.

    And it is failing. It’s failing in a long-term way. Gas prices are a long-term phenomenon. They’re never coming back down. There are no 11th hour solutions – oil drilling won’t get the oil flowing for another decade anyway.

    Without cheap airfare, folks will have to drive between LA and SF. And high gas prices will make that difficult as well. So the ONLY answer for intercity travel in our state, which so much of our economy – from tourism to business – relies upon is high speed rail.

    One reason I focus so much on the airlines is that a common argument against HSR is that nobody will use it because of available air service. That has been disproven in Europe and in the Northeast Corridor. And the underlying factors I describe here prove it for California.

    The other factors you mention are part of the reason for HSR, but the airline crisis is also a very important justification.

  3. Rob Dawg
    Jun 28th, 2008 at 09:55
    #3

    Don’t celebrate too quickly Robert. Priced Steel or Concrete lately? Both have more than doubled from the prices in the CAHSR estimates even indexing for inflation. THen there’s this electricity stuff that is also likely to triple for those actually purchasing at market prices.

    IMO the comparative cost analyses are not shifting in favor of HSR. YMMV.

  4. Robert Cruickshank
    Jun 28th, 2008 at 10:16
    #4

    Yes, steel and concrete prices are rising. That is one reason I have always said the final bill will be higher than $40 billion – but not by that much more.

    The CHSRA is studying ways to power the system through renewable and clean energy. That will lower the overall cost, and even with rising electricity prices HSR will be cheaper than airfares.

    HSR will still be a better deal for Californians and travelers than airlines even considering both factors. Besides, do you really think it’s smart for us to rely on airline travel alone?

  5. Rob Dawg
    Jun 28th, 2008 at 10:48
    #5

    The CHSRA is studying ways to power the system through renewable and clean energy. That will lower the overall cost.”

    Huh? Priced renewable electricity lately? It is uniformly more expensive even with subsidies and tax breaks.

    My point is to be realistic. The price of energy does CAHSR no favors. Burbank to Oakland on Southwest for Mon-Tues Business Class upgrade no deals is $144. Alternative to CAHSR $43.1 billion in the bank at 6% pays for 50,000 RT per day never touching the $43.1 billion. When is CAHSR expected to achieve 100k boardings per day? While we are on it 247k/day in 2030 is not believable.

    I’ve long contended that the biggest danger to HSR advocacy is unrealistic projections that can be refuted. You and I know it will cost a lot more than $40b but that is the number being put in front of the voters. The Jarvis group will eat that alive. Better to take the hit upfront and make the other side look like Luddites.

  6. Nikko
    Jun 28th, 2008 at 10:49
    #6

    I just wanted to add, its not impossible for HSR and airlines to work together. In Europe, Eurostar and Thalys train schedules are coordinated with airline flights to act as connections to other European destinations.

    For example, if you lived in New York and wanted to go to Brussels, you could fly to Paris, then get on a connecting train to Brussels.

    The same could be done in California. Someone from Hong Kong could fly into LA, then take a connecting train to the Bay.

  7. Rob Dawg
    Jun 28th, 2008 at 11:08
    #7

    Minor nit. Hong Kong is closer to San Francisco than LA.

  8. Robert Cruickshank
    Jun 28th, 2008 at 11:19
    #8

    My entire point, Rob, is that the price you quoted for Southwest airfare is not going to last. There will be fewer seats, fewer flights, at a much higher cost. By 2018 when the first segments of the HSR system are slated to open the cost of flying is going to be quite high.

    Yes, HSR will have its own cost issues to attend to, including electricity. But even with that in mind HSR has more cost certainty and will be able to provide cheaper fares than the airlines, who are dependent on a resource whose cost is going to soar over the next ten years.

    What makes you think we can simply put $43 billion in the bank? You’re assuming, as all HSR deniers do, that the cost of doing nothing is zero. It isn’t. We’re going to spend billions no matter what we do. The question before us is whether we spend billions on high speed rail or whether we spend billions in higher fares, lost tax revenue, and lost economic growth.

  9. davisgrad
    Jun 28th, 2008 at 11:37
    #9

    @ Rob dawg,

    Guess what they make roads out of? Asphalt, and the cost is up 25.9% since last year. (Hint, it’s petroleum intensive). There are going to be more people in California, and so some type of infrastructure will have to be built. HSR is superior to the equivalent roads or airport infrastructure. You have to compare apples to apples, not HSR to nothing. It’s simplicity that borders on intellectual dishonesty.

    http://www.usatoday.com/news/nation/2008-06-05-asphalt_N.htm

  10. Brandon M. Farley
    Jun 28th, 2008 at 11:53
    #10

    Robert, I do not disagree with you about airline woes with fuel prices. They will remain… at least in my opinion.

    But, not everyone planning to vote is like-minded like you and me.

    And, all we need is the airline industry to start talking about different strategies to minimize the impact of fuel this fall and thus begin undermining the pro-HSR marketing/news/editorial effort. It sends a mixed message to the fence sitters expected to vote on Proposition 1.

    High fuel costs are certainly a woe for the airline industry, but imo, it should play a supporting role with a host of others to frame the challenged airline industry.

    Hanging our hat on fuel prices… makes the pro-HSR argument potentially vulnerable.

  11. Robert Cruickshank
    Jun 28th, 2008 at 12:52
    #11

    I certainly believe, brandon, that the best case for HSR is a broad-based case. And of course this site has been making exactly that case. Nobody who consistently reads the blog could claim otherwise.

    Airlines themselves are trying to alert the public to the crisis. They’re trying to tell us that we need to develop long-term alternatives. The NYT article, the LAT article, Kelleher’s comments, are all suggesting that in the future we will see reduced service at a higher cost.

    The airlines aren’t planning some magic bullet solution – because none exists. The industry isn’t fighting us and is beginning to see the value of using HSR in service of their long-term goals, especially bringing passengers to airports for long-haul flights.

    So I just don’t see the basis for your concerns. If this blog were all airlines all the time, or if the airlines were plotting to undermine us, then yeah. But neither are happening.

  12. Rafael
    Jun 28th, 2008 at 13:49
    #12

    CHSRA and its backers in the legislature should pitch HSR to the airline industry as a business opportunity. In the long run, no-one will make any money off short-haul flights, so airlines will have to shift their business model toward long-haul travel. In that context, HSR becomes a feeder infrastructure for them much as local transit is for HSR.

    Among other measures, CHSRA should request IATA and ICAO codes for all HSR stations such that travel agencies all around the world can use the airline reservations systems to book connecting train journeys. Airports, CHSRA and local authorities will have to co-operate to deliver shuttle services between the train stations and air terminals and, an appropriate booking strategy for them.

  13. Robert Cruickshank
    Jun 28th, 2008 at 14:14
    #13

    Rafael is absolutely right about this and has been from the beginning. Continental and Acela already codeshare, as do many of the European HSRs and airlines. For example it would be easy for, say, United to sell tickets for someone to go from San José Diridon to Beijing, or Irvine to London. Airlines are beginning to see the wisdom of this and as they begin to reduce their presence in the shorthaul market this will become even more valuable.

    It’s worth noting that I’ve never, ever seen this as a competition. I don’t support HSR as some sort of effort to undermine airlines. They are natural partners. The fact is that California cannot rely on air travel to serve its intercity needs, nor can 7-hour roadtrips with gas at least at $5/gal serve it either. HSR is a necessary move if we’re to continue to link California to the rest of the nation and the world via air travel.

  14. Brandon M. Farley
    Jun 28th, 2008 at 15:08
    #14

    Is SDDT taken… San Diego Downtown. har har har.

    In fact, don’t some communities develop an attachment to these codes… kinda like some are attached to area codes?

    If so, it may be worth floating to add some visioning perspective for voters and business leaders. Just thinking.

  15. Joe
    Jun 28th, 2008 at 15:17
    #15

    As a few of you have mentioned the airline industry will probably still be around for a while, but it will be a very different industry than we have known for the past two decades. No more cheap “Friends Fly Free” promotions to Disneyland. My friends currently working in the aviation industry don’t paint a bright future for themselves or their companies. As one stated, “Jet fuel is our only alternative and it isn’t getting any cheaper.” There are many Californians, including hundreds of state workers, who regularly fly from Sacramento or the Bay Area to Southern California for both business and pleasure. Unless we want to pay hundreds of dollars per airline ticket in fuel surcharges or deal with a gridlocked I-5, California will need an alternative just to keep people moving. All factors considered, HSR seems like a great idea to me. Its actually a little shameful it isn’t already here. Just another example of previous generations’ short-sided thinking IMHO.

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