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Monday, October 20, 2008

$71 per barrel for crude - What will it change?

Despite what should have been the busiest travel season of the year, last week Southwest Airlines reported its first quarterly loss in 17 years. Continental and Delta also reported losses, citing high summer fuel costs as the chief culprit.

When the fuel costs hit $140 per barrel this summer, most US airline executives kicked into high gear, cutting capacity and frequency, paring costs and boosting revenues by increasing prices and adding as many fees as they thought the traveling public would bear, but as 3rd quarter results are now reflecting, the efforts to cut costs and augment revenues was not enough to offset the unprecedented cost of fuel.

On Friday, the price of crude oil futures fell to $71.85, well below the price one year ago and nearly 50% lower than the historic high this summer.

No one can dispute that airlines will benefit from lower crude oil futures, but what will the travel industry as a whole see in the near term from this sharp drop?

We should as an industry be celebrating, but I don’t hear any cheers or even a sense of optimism peeking through from the usual pundits.

It is important to understand that out of every barrel of oil (which apparently holds just under 45 gallons), 22.6 gallons goes to gasoline and just 5.5 gallons goes to jet fuel, with the balance going to asphalt, home fuel oil and other products such as lubricants and various gasses. So who benefits most from the drop in price? Will it follow this same distribution formula?

Will the airlines actually reap the kind of benefits shown in the chart above as it relates to their costs? Perhaps not quite as starkly as the chart shows, but they should definitely see lower costs than they did this summer. And will passengers see a corresponding drop in fares? I suspect not.

Actually I will be more definitive here, lest you see my statement as pure opinion.

  • Per ARC, year to date, airfares are up 10% domestically from last year’s average of $310.15 to $343.68 at the end of September.
  • And internationally, the ARC ticket average for international tickets is up 7% from $799.22 at the end of 2007 to $854.12.

It is safe to say that the crude oil price drop has already been most readily visible at the pump.

I hadn’t been paying attention to the price of crude oil since I published my white paper on the drive market, and so this weekend when I actually saw gas below $3/gal in Florida I thought it was a mistake.

Will we see even lower gas prices and more people driving that used to fly? If what I saw at the gas pumps this weekend holds true and airline prices stay as high as they have been, then most assuredly so.

This reinforces to me that my unrelenting pursuit of the drive market is on target. This market already represents 85% of all travel in the US and as a market segment should just get larger and stronger over time.

If you are interested in seeing how your business can benefit from this largely untapped market, please see my white paper on the drive market and check out the syndicated market study that the Solutionz Group and Mandala Research are fielding this fall (see story below).

I believe that this is a time to pursue revenue growth. We can't save our way to prosperity.


Chicke Fitzgerald
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