Month: October 2008

Will lower fuel prices affect the future demand for airline pilots?

The fact is that ticket prices had not yet risen high enough to compensate for the sharp rise in the cost of fuel. The first part of the recent reduction in fuel cost just lets the airlines catchup on their recent losses. The airlines are huge, complicated companies earning tens of billions of dollars each year. As a result of their size they turn slowly, like a large ship, adjusting their business plan to accommodate large shifts in variable cost like fuel takes time. In the meantime they can loose millions. If, while they adjust their plan to accommodate the higher cost, the cost of fuel increases even more, the losses continue.

What the airlines need are stable fuel prices so the plan they make is a plan that will work. In 2007 fuel prices were historically high yet the us airline industry and most individual airlines were profitable(add chart #67). High fuel prices are troubling to the airlines because they force the airlines to raise their prices but it is a manageable problem not an industry or even a company killer.

In fact the recent capacity reductions that started in early October 2008 are the result of an anticipated reduction in the demand caused by the planned increase in ticket cost to cover the increased cost of fuel. That is a mouthful but sums up the action-reaction aspect of rising fuel cost.

Many forecasters are predicting fuel prices will fall below $100 per barrel and some are saying that we could see $50 per barrel again. If we achieve $100 most US airlines will see a profit in 2009 and if we achieve $50 per barrel then the profits will be sizable indeed.

The relationship between airlines profits and pilot hiring is proven. A 25 year history is illustrated in the accompanying chart (From video slides #69) illustrates the one to one relationship between these two variables. In the late nineties several airlines made over $1 Billion per year and when they did they each hired 1,000 each year. The key to airline pilot hiring has always been profits and for many US airlines lower fuel cost should provide substantial profits in the near future.

onclick="javascript:pageTracker._trackPageview('/outgoing/usatoday.com');" target="_blank">Now that oil prices are down, why aren’t airfares?