Sunday, May 11, 2008

You WILL Be Paying Higher Airfares

“ airplane was ever designed to make a profit with jet fuel at these prices, and no carrier has figured out a way to charge enough to make up the difference.”

That is from a fascinating article in the current (May 12) issue of Fortune magazine. The author, Barney Gimbel (quoted above), is interviewing American Airlines CEO Gerard Arpey, and discussing the state of the industry.

The article talks of airline mergers (a mixed bag, but the Delta/Northwest merger isn’t viewed favorably); ticket pricing; extra fees and charges; competition (especially Southwest); and, most significantly, oil prices. “[Jamie Baker] J.P. Morgan analyst, thinks that at current fuel prices the industry needs to shrink as much as 20%.”

At jet fuel prices of $2.74 per gallon (when the article was written), American’s cost to fly one seat one mile increased 29% in one year. “The problem? The market allowed fares to go up only 5%.”

The final sad commentary comes from Arpey himself. “‘There is no business,’ he said, ‘that can go on forever selling its product for less than the cost to produce it.’”