More bad news for the airlines this morning, with a NYTimes story relaying how major carriers are attempting to deal with skyrocketing fuel costs. Southwest Airline's solution? Washing its planes each night to get rid of dirt particles that increase drag. You know it's bad when you're flying a nearly 200 ton plane and you're trying to save fuel one dust speck at a time.
Smaller airlines have been hurt as well, such as Silverjet, the British all business class carrier which went under last week that we wrote about. In a lucky turn of events, Silverjet was actually resuscitated this week, announcing that it was purchased by Kingplace, a company managed by a Swiss investment trust, according the International Herald Tribune. Silverjet is one of the lucky ones. Nearly 24 carriers have gone under in the six months since oil leapt up 47 percent, reports the International Air Transport Association. Unfortunately, Silverjet and most these airline companies shared the same, obvious problem:
"The oil-price rise was the thing that they really hadn't foreseen in their business plan," said Douglas McNeill, an aviation analyst at Blue Oar Securities in London (via the IHT).
Shy of having a crystal ball, was there anyway these smaller airlines could have planned for skyrocketing oil costs in their business plan? Even if they could have, short of raising fares (and cleaning specks of dust off planes), what else could they have planned to do to offset fuel costs without bleeding customers? Or are these minor carriers simply destined to fail in market where oil costs nearly $140 a barrel?
McNeill's suggestion: Fly more planes to Dubai.
What do you think?
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I'm so tired of hearing these excuses and complaints from the airline industry.
First, this is the precise reason why futures contracts were created. These airlines should have been purchasing option ontracts on fuel way out into the future as a hedge against rising fuel prices. Their failure to adequately hedge their fuel costs is not an excuse. A proper options portfolio would have enabled the airlines to plan their fares accordingly.
Second, all airlines face the same exact problem, so I cannot believe that an accross the board rise in fuel costs that equally affect all carriers can be that damaging. A rising tide lifts all boats and vice-versa.
Third, they should have been attempting to conserve fuel all along, just as benpirie mentioned. If they would have focused on efficiency from the beginning, they would have increased their margins during the good ole days and would now be sitting on a rainy day fund.
No more excuses please.
—mjandri
13:52, June 11th, 2008
That's why I love Southwest. True southern hospitality. Any company that would clean themselves up before charging for checked bags is one I'll support.
—richard
13:50, June 11th, 2008
Speaks to the importance of looking for efficiencies even in fatter times. Who knows if it would have saved much money when fuel costs were 1/4 of what they are now, but it seems like the airlines got complacent and got burned when the marketplace changed. Carriers (or businesses in general) would do well to make changes when they aren't urgently needed so as to be better positioned when they are.
—benpirie
13:29, June 11th, 2008
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