Saturday, June 14, 2008

Airlines "Heading Toward A Catastrophe"

NOTE: We've moved! Visit us at the California High Speed Rail Blog.

While the state media and the State Senate stick their fingers in their ears, cover their eyes, and ignore the reality around them actual business observers are sounding the alarm about the growing crisis in the airline industry. Via the Dallas Morning News comes a Business Travel Coalition report examining the "catastrophe" that the airlines are headed for - and their belief that a "national energy policy" is needed to deal with the looming disaster:

As a consequence of the skyrocketing price of oil, the U.S. commercial aviation industry is in full-blown crisis and heading toward a catastrophe.

In the hopes of bringing attention to the magnitude of the oil crises, Business Travel Coalition (BTC) commissioned AirlineForecasts, LLC to provide an analysis of what oil at several different price points means in terms of lost airline jobs, reduced seat capacity and increased fare levels.

AirlineForecasts concludes that if oil prices stay anywhere near $130/barrel, all major legacy airlines will be in default on various debt covenants by the end of 2008 or early 2009. The implication is that several large and small airlines will ultimately end up in bankruptcy, and of those, some will be forced to liquidate.

While economic theory suggests higher and unsustainable fuels costs will lead to a smaller industry, it does not necessarily follow that the industry will reach its smaller size before collapsing along the way under the weight of higher fuel prices.


In other words, high oil prices are going to cause higher fares on fewer flights on fewer airlines. Not exactly a ringing endorsement - and as we know that fuel costs are going to remain high for the foreseeable future, this problem is only going to get worse - as the report recognizes:

The U.S. airlines, and those who depend upon them, are watching with growing alarm as their cash reserves fall precipitously toward zero as the price of oil, already at unsustainable levels, continuously spikes into uncharted territory. These airlines and their stakeholders have never faced a darker future.


I don't see how the state media and the State Senate can continue to ignore this crisis. Neither group has paid any attention whatsoever to the issue. The media continues to prattle on about "financial risk" with the HSR bonds whereas the true risk lies with doing nothing as the airline industry collapses. And the State Senate, which could not be bothered to even mention the airline crisis or the oil price issue, is equally ostrich-like in its approach to HSR and the overall transportation environment in California. The BTC, which knows much more about that transportation environment, is not so sanguine:

The consequences of the hole this will leave in our nation's transportation grid will be extremely profound for our economy, society and culture.

A catastrophic result for U.S. airlines can be averted if policymakers, particularly in the White House and Congress, step up purposefully to address this monumental challenge. There is still time to make a difference. This is important not only for airlines and their passengers, but also for every business that uses oil products.


The BTC did not provide specific suggestions aside from calling for a "national energy policy" and Congressional action to stabilize the airlines. My guess is they'd like another bailout. Subsidies are OK for airlines even though their basic business model is collapsing but god forbid we spend some money on a proven travel system that takes the burden off of airlines and provides sustainable travel that is independent of oil prices - HSR.

But at least the BTC is sounding the alarm. It's an alarm that is growing louder. Who in California will hear it?

14 comments:

arcady said...

And of course the airline industry is starting to beg for a government bailout. If I were a politician or lobbyist, I'd propose a simple plan for giving it to them: the 50-50 plan. For every dollar that goes into bailing out the airlines, a dollar goes into capital expenditures for Amtrak. Whoever is most effective after a couple years gets to keep the subsidies thereafter.

Rafael said...

@ arcady -

nice idea, but trains are a poor substitute for air travel over long distances. Even for a short hop like SF-LA, it would take one of the world's fastest bullet trains to compete. Pitting Amtrak against the airlines in a winner-takes-all proposition for subsidies on long-haul travel makes no sense because of the enormous disparities in traffic volume.

Economic theory suggests the best thing to do would be to let weak airlines fold so those that remain can raise fares to adjust to the reality of expensive fuel. Customers would respond by traveling less frequently and use modern telecommunications tools more heavily.

When airline ridership collapsed in the months after Sept. 11, 2001, the industry was in dire straits but the economy as a whole coped fairly well. Some would argue that's only because airlines were bailed out at the time. That's debatable.

In any case, political reality may be very different: with an economy already in recession and an upcoming election, it is likely that airlines will be bailed out or at least once again given generous terms if they file for Chapter 11 protection. A job lost is a vote lost. Actually, make that 10 votes.

---

On the bright side, there is now evidence of broad bipartisan support for continued subsidies for Amtrak as well as public investment in freight and passenger rail infrastructure. Unfortunately, these is inherently medium-to-long term projects. Minor upgrades will provide a useful economic stimulus during the recession, but major projects require a lengthy EIR/EIS process. At this point, only the California HSR system is at least close to completing that.

Politically, the issue is no longer, by and large, one of goodwill toward passenger rail but one of of scale: the target should be to gradually upgrade all 11 of the identified high-speed corridors to support:

- top speeds of at least 110 mph (more where justified by ridership)
- increased service frequency
- sharply improved on-time performance.

Funding would follow the California model: 30% each from state(s), federal and private investors plus 10% from the cities and counties served.

A similar target but at 79mph (more where justified by ridership) should be established for heavily trafficked commuter rail corridors. However, these are public services not business propositions. The funding model for capital improvements should therefore be 40% cities and counties served plus 30% each from state(s) and federal sources.

Electrification makes sense wherever warranted by either air quality issues or the need to increase corridor capacity through higher acceleration. Overhead catenaries at 25kV AC should be used wherever possible. Note that there are bi-modal locomotives that can switch between diesel and overhead electric power on-the-fly.

Speed and capacity improvements in all of these corridors may require noise abatement measures where residential properties abut the alignment or aerial structures are used.

All this will add up to hundreds of billions of dollars over 30 years, most from public purses at all levels. That implies a public works program comparable only that for the interstate network in the 1950s. To put that into perspective, waste at the Pentagon has now reached astronomical proportions. Clearly, it's all about spending priorities and project comptrolling, not a genuine lack of federal funds.

One idea would be to cut deals in which freight operators sell land to Amtrak so it can build new track there, which it would then own. The operators would then enter into mutual trackage rights agreements that also specify priority for passenger trains, minimum track maintenance levels etc.

In cases where this expands single into dual track alignments, each track track would of course be used to support all trains traveling in one direction. All passenger stations should feature bypass tracks, but freight trains will still need to speed up to make the construct work. In Europe, it's not uncommon for them to run at 100mph or more in shared corridors.

To make that possible, FRA should be tasked with developing and implementing a long-term program to harmonize its active and passive safety rules with those that are used internationally. Sherman tanks on wheels waste a lot of fuel, be it diesel or coal at a power plant. Safety-related low speed limits also constrain capacity and encourage the use of trucks over rail to haul goods, even over fairly long distances.

Anonymous said...

@Robert

Boy have you got blinders on. You write:

"These airlines and their stakeholders have never faced a darker future."

Nonsense -- baloney. Have your forgotten 9/11?

Robert Cruickshank said...

anon, those weren't my words - those were the words of the Business Travel Coalition that I merely quoted. Nice to see the HSR deniers are reading these posts so closely...

Robert Cruickshank said...

And yes, this crisis is worse than 9/11. That was a temporary slump in air travel caused by the nexus of a one-off terrorist attack and the dot-com bust. This crisis is long-term since it is produced by lasting changes in the fundamentals of the industry - namely the end of cheap oil.

Anonymous said...

@Rafael

The interstate highway program of the 1950's was started, I believe, with $25 billion from the Feds for the whole nation. The deal was the states pay only 10% and 90% came from federal money.

It was a huge success and transformed highway travel in the US.

You may be right in essentially saying we should move on to a new model, and passenger rail should be a major part of that model. The question of whether it should be public or private rail should be decided. I am not convinced that public owned passenger rail is the answer.

I think the money involved is not in the billions, but trillions of dollars.

Abandonment of air travel or highway programs is not an option. Each has more flexibility and should survive in new forms.

There is a new article in the Modesto Bee. Not terribly well informed, but it points out major problems with the present HSR project.

http://www.modbee.com/opinion/
story/329324.html

CComMack said...

Anon @7:11:

After 9/11, the airlines had a reasonable expectation that people would eventually no longer be afraid to fly. The business would come back (and it did).

There is no reason to expect oil to cost less than $120/barrel, ever again. The pain is never going away.

Rafael said...

Bill McEwen writes in today's Fresno Bee that airlines oppose HSR. I'm not convinced that is the case, so far we haven't seen the kind of opposition that Southwest mounted against a similar project in Texas a decade ago.

At a time of high fuel costs, the least profitable part of the airline business is short-hop shuttles using relatively small aircraft. The most profitable end is long-haul and transoceanic flights, so that's what the airline industry will want to focus on if the price of oil stays high. The industry as a whole may contract, but it will become more profitable.

California's HSR network was designed connect to as many airports as feasible. There will be intermodal stations at Ontario and Palmdale, plus stations near SFO, SJC, SMF and SAN. Oakland airport can be reached via BART plus a planned people mover. SNA may well get a direct bus link to Anaheim. The biggest omission is LAX, which was too far from any viable alignment. A heavy rail shuttle would be possible there, as would one in Fresno.

With so many airports connected, there is a good chance carriers will come to consider HSR operators as business partners. Consider United Airlines' GroundLink program in France as the shape of things to come in Palmdale and Ontario. Note the IATA booking codes for the TGV train stations. Some airlines may even choose to change their business model even more and operate some trains themselves, cp. Virgin Trains in the UK.

A few airlines may go out of business in the next few years, but the industry as a whole will not. In California, that may well be thanks to rather than in spite of HSR.

davisgrad said...

9/11 was a serious crisis, but a temporary one. This crisis is structural.

"Economic theory suggests the best thing to do would be to let weak airlines fold so those that remain can raise fares to adjust to the reality of expensive fuel. Customers would respond by traveling less frequently and use modern telecommunications tools more heavily."

This is true, the question is whether the airlines have enough market power to raise fares quickly enough. The report seems to imply that its a race between bankruptcy and higher fares, and bankruptcy might win.

I think reregulation is not out of the question (if not nationalization a-la amtrak, though thats a little premature). This would raise fares high enough quickly enough for the airlines to stay afloat, at the price of sky-high fares for customers. But it may be the only way to keep the airline system going.

Any HSR deniers want to bring up the ultra cheap budget fares that are going to be a much better deal than HSR? I think not.

Anonymous said...

Certainly the airlines are going to be against this project. Why would a private corporation not be against a publicly owned and subsidized operation, one mission of which is to take at least 50% of the traffic from them on the LA to SF areas. The ATA is on record as opposing. Southwest certainly to date has not (officially) opposed the project. But its early in the game. They have plenty on their plate right now running an airline in these difficult times.

The Fresno Article says:

"If the price scares you, know this: meeting intercity travel demands through 2020 with more airports and highways would cost twice as much -- $80 billion -- as high-speed rail. And private money will go into the rail system, so it won't rely solely on taxpayer dollars."

I always find it amazing this blog and now the Fresno paper keep talking about inflated future airport costs, while denying the $43 billion price tag put on HSR, is a un-realistic low number. The article this morning in the Modesto Bee points that out explicitly.

I haven't yet seen any private funding commitments. What I saw was Siemens acknowledging an interest. But look, they want to become a major vendor to the project. Lehman was supposedly really interested. Look at their stock lately? Can they afford another debacle like they have gotten themselves into with the mortgage crisis?

Rafael said...

@ anonymous @ 12:15pm -

the $82 billion figure for the modal alternative that CHSRA has studied includes 5 additional runways and 3300 lane-miles of freeway expansions.

HSR dovetails well with long-haul air travel. Only a small number of well-run discount airlines make any money at all off short-hop flights these days. Though you might scoff at the notion now, even they might well generate higher profits from operating intercity trains. Successful businesses don't rigidly stick with the same business model when market conditions change.

That said, HSR's primary competition is really the motor car, especially within the Central Valley, between the Central Valley and the Bay Area and between San Diego and Orange County/LA - i.e. trips of 30-300 miles. The LA/OC-Las Vegas route would also be a prime candidate for HSR.

無名 - wu ming said...

on the bright side, the airlines going bust and cutting down their routes to bare-bones nubs will free up a fair amount of oil to ease the price off, in the short term anyway.

once those routes get cancelled, though, the choice will be amtrak or driving. and with gas going ever upwards, driving will be the more expensive of the two. and if/when we hit spot shortages, the bigger headache in all kinds of ways. who wants to be the guy who gets in line for gas in barstow on 40 or 15 just when they hang the "no sale" bags on the pumps?

expanding regular rail in all aspects (fixed up tracks, better maintainance, increased rolling stock, more double tracks to handle increased freight without delaying amtrak), electrifying as much as possible, and throwing serious resources into building HSR in all corridors that currently rely on short haul airline routes will make that "oh shit" moment for the years after the planes start going bust a lot less painful, economically and otherwise.

Rafael said...

@ wu ming -

the commercial aviation industry consumes a lot of fuel, especially on short-hop flights. Take-off, climbing and thrust reversal after landing all consume lots of fuel. With just ~200 seats, aerodynamic losses per passenger are also fairly high.

However, modern long-haul aircraft like the A380 and especially, the Boeing Dreamliner (both nearing completion) actually make do with 3-4L/100km per passenger at 100% occupancy. In my experience, long-distance flights are usually quite full. For reference, a car uses 6-10L/100km.

In aggregate terms, airlines are responsible for about 2% of global emissions of fossil carbon. While that share is growing, it is still an order of magnitude below that of the aggregate impact of motor vehicles on the ground. If the US airline industry contracts in response to high kerosene prices, that particular fuel will become a little cheaper again in that one country. However, the impact on the price of oil will be negligible.

Also, unless a large oil producing nation suddenly were to lose a lot of supply capacity due to a natural disaster, terrorist attack or political uprising, there will be no actual supply shortfall in the next decade. The cheap oil may be gone but there's no justification for painting the specter of rationing at US gas stations - last seen in 1973.

Looking beyond the next decade or so, it would indeed be very useful to invest now in all-electric transportation infrastructure and renewable electricity generation. This includes electric bicycles and scooters, plug-in hybrid cars and buses, pure battery electric cars as well as electric trains like HSR, perhaps even the return of trolley buses and trucks.

This transition will be costly and take decades. It will also be incomplete, especially if efforts to develop second-generation biofuels like algal oil and biomethane finally bear fruit. The point is to get a handle on energy security and global warming by diversifying away from the oil monoculture, especially in the transportation sector.

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