It will be harder to find cut-rate airline tickets. There will be fewer domestic seats available. And expect the talk of mergers and takeovers to accelerate.
Those are just a few of the ramifications aviation experts expect as the price of oil approaches $100 a barrel and financially pressed airlines try to cope with costly crude and even higher priced jet fuel.
Crude oil briefly touched $98 a barrel late last week before backing off a bit to $96.32 Friday. The price of refined jet fuel is about $15 a barrel higher.
"We are going to see less flying; there's no question," Colorado-based airlines analyst Mike Boyd said. "You're going to see it become uneconomical to fly to some regional locations. It changes the economics dramatically when your fuel process goes up 75 percent in a year."
Atlanta-based Delta Air Lines, which emerged from bankruptcy in the spring, has increased ticket prices several times, but not enough to keep pace with soaring fuel costs, officials say. Cutthroat competition among domestic carriers limits the ability of U.S. airlines to raise ticket prices.
"What you will see us doing is probably reducing the number of lower-fare tickets available," Delta President Ed Bastian said in an interview with The Atlanta Journal-Constitution.
Bastian said the airline expects to save about $125 million this year by using hedges to lock in the price of fuel. He said the airline is also maintaining its strategic plan to cut domestic capacity while increasing its more profitable international routes.
"Our growth in international will continue unabated," he said. "We're going to grow next year at about 15 percent internationally."
Orlando-based AirTran Airways, which also uses Atlanta's Hartsfield-Jackson International Airport as a hub, is slowing down airplane deliveries in reaction to the slowing economy and high fuel costs. AirTran officials said the airline could ditch certain flights if soaring costs make them unprofitable.
"We're going to be much more aggressive in 2008 . . . to not fly with $90 oil," AirTran Chairman Joe Leonard told industry analysts late last month.
Boyd said many airlines will be facing that choice, especially with some of their more remote regional flights.
"At $70 a barrel oil, they can make money," he said. "When it goes to $100, they'll have to park some airplanes."
John Heimlich, chief economist with the Air Transport Association of America, said that despite higher fuel costs, the airline industry will remain profitable for 2007. In January, Heimlich predicted U.S. carriers operating worldwide would post profits of $4 billion to $5 billion year.
"I'm sticking with the high end of that range for 2007," he said.
Heimlich said airlines have kept seats filled and revenues flowing despite fuel costs.
"It's been pretty much a wash for this year," he said.
Heimlich said there is a tug of war between those who think oil prices will top $100 a barrel and stay there and those who believe the current spike will be short-lived. He falls in the latter category.
He predicts that for 2008, oil will be in the $70-$75 range per barrel when averaged over the entire year. Heimlich believes investors will begin to take profits in oil later this year, which would drive down the price. And he thinks the Organization of Petroleum Exporting Countries will raise production. Couple those factors with a slowing national economy, and you could see lower prices, he said.
"I think we're more likely than not to cross $100," he said. "The real question is how long it stays up there. I personally don't think it will be protracted."
However, if prices go north of $100 and stay there, it could accelerate talk of merger and takeover activity in the airline industry. Many insiders believe that the half-dozen legacy carriers such as Delta could be reduced to four within a few years.
"If $100 fuel is going to be our price point going forward, the prospects of consolidation certainly become more important," Delta's Bastian said. "We would never make a decision on consolidation based on that factor alone. But it puts added pressure on the decision."
Heimlich agreed higher fuel costs could speed consolidation.
"Capacity will come out of the system through one airline's reduction, one airline's disappearance or two airlines merging together," he said. "They are all forms of eliminating additional capacity that is financially marginal or nonviable at a certain price of oil."
