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Price of Oil / Jet fuel

By Bernard

The first major problem affecting the airline industry is the price of oil.  The belief exists in the world that the supply of oil is slowly dwindling and within 50 years it will cease to exist.  This, combined with the war in Iraq, the storms in the Gulf of Mexico, and other factors, has lead to a severe increase in the price of oil over the last decade.  This is the same for the airline industry.  Jet fuel, used to power all planes, is a product of oil and has, itself, continuously increased in price.  This increase in price has caused airlines to restructure themselves, which has negatively affected the industry.

Airline Fuel Cost and Consumption (All U.S. Carriers)   
Januray 2000 - August 2008   
Year Month Domestic   
    Consumption Cost Cost per Gallon
    (million gallons) (million dollars) (dollars)
2000 January 1,194.00 842 0.71
2000 February 1,157.60 851.1 0.74
2000 March 1,251.60 940.2 0.75
2000 April 1,220.30 905.6 0.74
2000 May 1,250.70 898.9 0.72
2000 June 1,261.70 876.7 0.69
2000 July 1,296.90 994.2 0.77
2000 August 1,311.80 1,035.30 0.79
2000 September 1,174.80 1,008.20 0.86
2000 October 1,274.70 1,136.20 0.89
2000 November 1,227.90 1,087.90 0.89
2000 December 1,243.40 1,132.10 0.91
2000 Total   14,865.40 11,708.30 0.79

2001 January 1,226.70 1,051.80 0.86
2001 February 1,136.70 962 0.85
2001 March 1,258.90 1,001.50 0.8
2001 April 1,193.20 925 0.78
2001 May 1,243.30 1,007.40 0.81
2001 June 1,253.00 1,011.70 0.81
2001 July 1,279.30 991 0.77
2001 August 1,314.90 1,006.60 0.77
2001 September 934 742.9 0.8
2001 October 1,009.30 716.6 0.71
2001 November 985.4 650.9 0.66
2001 December 1,033.10 588.8 0.57
2001 Total   13,867.90 10,656.20 0.77
% Chg over 2000   -6.71% -8.99% -2.44%

2002 January 1,031.30 618.8 0.6
2002 February 958.4 591.3 0.62
2002 March 1,095.60 676.7 0.62
2002 April 1,057.40 733 0.69
2002 May 1,091.90 765 0.7
2002 June 1,112.90 744.6 0.67
2002 July 1,160.30 820.6 0.71
2002 August 1,158.70 837.9 0.72
2002 September 1,025.80 788.2 0.77
2002 October 1,113.50 902.5 0.81
2002 November 1,045.00 804.2 0.77
2002 December 1,071.50 816.7 0.76
2002 Total   12,922.20 9,099.60 0.7
% Chg over 2001   -6.82% -14.61% -8.36%

2003 January 1,079.70 903.5 0.84
2003 February 977.2 866.8 0.89
2003 March 1,115.40 1,101.10 0.99
2003 April 1,048.80 872.1 0.83
2003 May 1,080.60 823.7 0.76
2003 June 1,092.90 821.5 0.75
2003 July 1,158.30 906.5 0.78
2003 August 1,157.90 959.4 0.83
2003 September 1,047.00 841.6 0.8
2003 October 1,116.40 912.4 0.82
2003 November 1,065.80 899.6 0.84
2003 December 1,141.70 1,006.70 0.88
2003 Total   13,081.80 10,914.90 0.83
% Chg over 2002   1.23% 19.95% 18.49%

2004 January 1,118.80 1,064.80 0.95
2004 February 1,087.30 1,055.00 0.97
2004 March 1,202.30 1,181.30 0.98
2004 April 1,154.10 1,157.30 1
2004 May 1,177.20 1,273.50 1.08
2004 June 1,193.10 1,280.90 1.07
2004 July 1,240.90 1,382.60 1.11
2004 August 1,243.40 1,466.60 1.18
2004 September 1,116.90 1,387.80 1.24
2004 October 1,198.20 1,659.30 1.38
2004 November 1,146.10 1,567.00 1.37
2004 December 1,212.50 1,550.70 1.28
2004 Total   14,090.70 16,026.60 1.14
% Chg over 2003   7.71% 46.83% 36.32%

2005 January 1,139.50 1,495.50 1.31
2005 February 1,067.50 1,404.40 1.32
2005 March 1,222.00 1,772.70 1.45
2005 April 1,155.20 1,799.10 1.56
2005 May 1,176.20 1,781.80 1.51
2005 June 1,205.90 1,874.60 1.55
2005 July 1,248.00 2,008.60 1.61
2005 August 1,242.50 2,228.00 1.79
2005 September 1,110.80 2,108.00 1.9
2005 October 1,118.90 2,410.00 2.15
2005 November 1,114.50 2,075.00 1.86
2005 December 1,161.10 1,968.20 1.7
2005 Total   13,962.10 22,925.90 1.64
% Chg over 2004   -0.91% 43.05% 44.37%

2006 January 1,091.80 1,961.20 1.8
2006 February 1,008.50 1,837.30 1.82
2006 March 1,169.60 2,116.10 1.81
2006 April 1,116.00 2,126.10 1.91
2006 May 1,128.10 2,306.60 2.04
2006 June 1,162.80 2,392.20 2.06
2006 July 1,184.20 2,465.60 2.08
2006 August 1,208.50 2,567.60 2.12
2006 September 1,097.30 2,178.90 1.99
2006 October 1,144.30 2,133.70 1.86
2006 November 1,112.10 2,010.50 1.81
2006 December 1,159.20 2,159.70 1.86
2006 Total   13,582.30 26,255.20 1.93
% Chg over 2005   -2.72% 14.52% 17.72%

2007 January 1,107.00 2,012.40 1.82
2007 February 1,013.60 1,769.40 1.75
2007 March 1,163.60 2,113.20 1.82
2007 April 1,121.00 2,178.10 1.94
2007 May 1,146.80 2,344.40 2.04
2007 June 1,159.70 2,353.00 2.03
2007 July 1,185.30 2,482.90 2.09
2007 August 1,201.60 2,552.50 2.12
2007 September 1,082.90 2,282.10 2.11
2007 October 1,144.10 2,529.30 2.21
2007 November 1,098.00 2,682.80 2.44
2007 December 1,135.80 2,838.90 2.5
2007 Total   13,559.60 28,138.90 2.08
% Chg over 2006   -0.17% 7.17% 7.35%

2008 January 1,080.50 2,783.00 2.58
2008 February 1,035.70 2,638.10 2.55
2008 March 1,127.90 3,227.10 2.86
2008 April 1,067.50 3,170.70 2.97
2008 May 1,093.10 3,482.80 3.19
2008 June 1,100.30 3,737.70 3.4
2008 July 1,135.30 4,197.20 3.7
2008 August 1,094.20 3,723.20 3.4
2008 YTD   8,734.30 26,959.70 3.09
% Chg over 2007 YTD   -4.00% 51.41% 57.73%

The consumption and increasing price of jet fuel can be observed in the previous table.   In the year 2000, the consumption of jet fuel (in millions of gallons) was 20,373.3, with the cost (in millions of dollars) being 16,447.5.  This resulted in an average value of jet fuel being $0.81/gallon.  Also, in the year 2004, the consumption of jet fuel (in millions of gallons) was 19,682.8; however, the cost (in millions of dollars) was 22,758.2.  This added up to a total of $1.16/gallon for fuel.  This shows that by 2004 the price of fuel, which increased $0.35/gallon, was beginning to rise rapidly.  Airlines were now spending more money for less fuel.  In addition to this, from January to August 2008, the consumption of jet fuel was only 12,968.3 million gallons, with the cost of that fuel being 41,018.4 million dollars.  In these 8 months, the cost of jet fuel saw an increase of 56.37% over 2007.   From January 2000 until August 2008, the price of jet fuel has more than tripled, from $0.73/gallon to $3.16/gallon (a difference of $2.43).

The increase in fuel, as stated above, has led the International Air Transport Association (IATA) to predict a loss of US$5.2 billion in 2008.   “That’s US$40 per barrel more than the US$73 per barrel average for 2007, pushing the industry fuel bill up by US$50 billion to an expected US$186 billion this year,” said Bisignani (IATA’s Director General/CEO). Fuel is expected to rise to 36% of operating costs, up from 13% in 2002”.    The price of fuel, as is evident from above, is now becoming so high that it is becoming the chief expense of the airline industry.  With fuel expected to reach 36% of total operating costs, employee salary and maintenance expenses seem almost trivial.  The high cost of fuel, combined with the inefficiency and repairs necessary to keep the ageing fleets in the air, only serves to destroy any chance of attaining profit, and increase the losses incurred.  In contrast to this, the airlines themselves only receive 6% on the return of capital, which is 2-3.5% less than the cost of capital.

Furthermore, because of oil’s increased price, airlines have found it impossible to turn a profit and are forced to declare bankruptcy.  In 2008 (up to this date) four airlines in the United States have filed for and declared a discontinuation of operations.  Meanwhile, other airlines like Delta and Northwest are forced to merge in order to use their assets to avoid declaring bankruptcy.   This is all due to the increased burden placed on these companies by the rapid increase in jet fuel.  Furthermore, because airlines are declaring bankruptcy, competition is decreasing.  Competition, which keeps prices low and to the benefit of the consumer, is now vanishing and being replaced with few airlines that are increasing their prices.  Although this will be discussed in detail in the second major problem, this increase in prices is happening because airlines are attempting to achieve revenue that outpaces their expenses.    

Finally, the world economy is in a stage of economic recession.  This recession has led to a rapid drop in gas prices (as we are experiencing now).  This will allow the airline industry some breathing room and the ability to momentarily repair itself.  However, this period of low prices will not last long as the supply of oil is consistently decreasing.  Unless airlines are able to find new ways of cutting costs, as decreasing flights and employees are not enough, then the industry will continue to falter and more airlines will have to declare a discontinuation of operations.

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