2008 June 28 Saturday
US Airline Industry Set To Shrink

Former American Airlines CEO Bob Crandall tells Businessweek some changes that would help the struggling airline industry.

--Revising U.S. bankruptcy laws to...

“...deprive failed carriers of the right to use lower costs to undercut the fares offered by their more prudent rivals, forcing both management and labor to face the twin specters of liquidation and unemployment.”

In other words, take away the option of Chapter 11 and force troubled carriers into Chapter 7 – the mere threat of which could force labor groups to offer concessions more readily, rather than being content to milk the cow until it keels over and only then consent to a lower wage scale. You know this will be popular with workers…

--Creating regulations that limit the number of scheduled flights to what the airport can handle. This is already a problem at airports like JFK in New York, which routinely slot far more flights than was ever intended – explaining why your 5 pm flight never leaves before 7 pm. Crandall argues that current schedules should be “reduced proportionally,” which would force each carrier to use the largest feasible aircraft in each slot. So bye-bye regional jets—and bye-bye competition.

The problem with takeoff and landing slots could be solved by selling them to the highest bidder. But the airlines have opposed this introduction of market forces for years. Business jet operators have opposed it even more because they want to land at places like JFK at peak times but would get outbid by jumbo jets.

As for bye-bye competition: if the slots were sold in a bidding process that would increase competition since airlines would compete to use each slot for the most profitable purpose. That would increase efficiency, reduce delays, and also reduce fuel usage as airplanes wouldn't circle waiting to land or idle waiting to take off. The ability to periodically bid for slots would allow new entrants to displace existing entrants.

Regardless of what the airlines do we are going to see less air travel in the United States and other Western countries as limited oil supplies and the bidding up of prices on those oil supplies by Asian countries drives ticket prices so high that passenger volume and number of flights will drop.

American and American Eagle are ending service to 8 airports.

American (NYSE: AMR), based in Fort Worth, Texas, and American Eagle serve 250 airports combined. The airports American will leave are: Oakland, Calif.; London Stansted; and Barranquilla, Colombia; and Albany, N.Y.; Providence, R.I.; Harrisburg, Pa.; Samana, Dominican Republic; and San Luis Obispo, Calif., for American Eagle, which also will close its maintenance base in San Luis Obispo.

The US airline industry is going to shrink back to where it was 10 years ago. Then it will shrink even further.

This week, the country’s two biggest airlines, American and United, announced plans to lop cities like Fort Lauderdale, Fla., and San Luis Obispo, Calif., out of their networks. Cuts also are taking place on international routes to cities like London and Buenos Aires, and even to popular vacation destinations in the United States like Las Vegas, Honolulu and Orlando.

With more reductions coming next year, all the domestic industry’s growth over the last decade will most likely be lost. “The U.S. industry is undertaking a historic restructuring,” Gary Chase, an industry analyst with Lehman Brothers, wrote in a research report Friday.

Some of the major airlines are headed for bankruptcy and liquidation.

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.

Each of the airlines is trying to survive until their competitors liquidate. With the resulting reduction in total capacity the survivors can raise fares to levels high enough to pay for higher fuel costs. So which ones will go into liquidation? Some of the liquidations have to involve big airlines because the amount of needed capacity reduction is quite large.

At current oil prices about 1000 airplanes will need to get parked by US airlines.

Every $10 increase in the price of oil results in $4 billion in additional costs for the 40 passenger-only airlines. Oil prices have spiked to $135/barrel from last year's $72/barrel average. With oil prices in the $135 range, the airline industry could be forced to park upwards of 1,000 aircraft and shed over 80,000 employees, and still not return to health.

1000 idled airplanes equal about one year of the combined output of Boeing and Airbus.

Airbus has a backlog of 3,655 planes, or more than six years of work. It delivered a record 453 aircraft last year and is planning to hand over about 470 this year. EADS Chief Executive Officer Louis Gallois said on June 18 there were no plans to slow the production increase.

Boeing, which had a backlog of 3,645 orders as of May, is in ``constant contact'' with customers and regards deferrals and cancellations as ``a normal part of its business,'' spokeswoman Sherry Nebel said last night by telephone. It plans to deliver 480 planes this year, up from 441 in 2007.

The older and less fuel efficient airplanes will get parked first. You might expect Boeing to benefit from this because of their new and highly fuel efficient 787 Dreamliner. But Boeing needs to delay 787 shipments yet again for some redesign work.

Share |      By Randall Parker at 2008 June 28 08:30 PM  Economics Transportation

Greg Meadows said at June 29, 2008 7:29 AM:


Thank you for this article. I think it shows what kind of trouble we are in. As you
mentioned in an earlier post, the alternatives that will eventually replace oil are not
being developed fast enough.

We need to go back to the tried and true of the use of fossil fuels such as oil. We
need the time to develop new sources. From this article, we don't have the time. The newer,
"greener" sources won't be available for years. We need new sources of energy right
now. Even if we started drilling now, it would take about 4 years, according to one
article I read, in order to see results. But we need to get started right now.

Another article I read says that Congress banned the use of Canadian tar sands oil last
year. If this ban were lifted, this oil would be available right now, as production is
already taking place from these sources. A few years from now, oil shale technology will
be able to produce substantial supplies. But that is being blocked also.

If energy supplies continue to be blocked by environmental concerns, we will start to see
troubles like the ones mentioned in this article. A question should be asked, should be
sacrifice our economy on the altar of radical environmentalism? I think the answer should
be obviously "no".

Randall Parker said at June 29, 2008 9:42 AM:


Even if we opened up the outer continental shelf (and I'm all for it) there are not enough drilling ships available to do anything about it:

“The crunch on rigs is everywhere,” said Alberto Guimaraes, a senior executive at Petrobras, the Brazilian oil company that has discovered some of the most promising offshore oil but has been unable to get at it.

“Almost 100 percent of the oil companies are constrained in their investment program because there is no rig available,” he said.

As a result, drilling costs for some of the newest deepwater rigs in the Gulf of Mexico — the nation’s top source of domestic oil and natural gas supplies — have reached about $600,000 a day, compared with $150,000 a day in 2002.

These record prices have spurred a new wave of drill-ship construction. This boom could lead to renewed offshore oil exploration that would eventually bring more supplies to the oil market, and push down prices.

Already, 16 new drill-ships are scheduled to be delivered to oil companies this year — more than double the number delivered over the last six years combined. In fact, 75 ultra-deepwater rigs should be delivered from 2008 to 2011, according to ODS-Petrodata, a firm that tracks drilling rigs.

Petrobras has 3 of the rigs it needs to put its offshore discoveries into production. One problem: They need 69 more!

Petrobras, whose full name is Petróleo Brasileiro, is expected to drive much of the growth in the booming new market. The company has outlined an aggressive program to increase its drilling capacity, and plans to contract or build 69 deepwater drill-ships by 2017.

Brazil stunned the oil world when it announced the discovery of a vast oil field 200 miles south of Rio de Janeiro last November, turning the country’s deep blue waters into the world’s most exciting oil frontier. Energy experts said the field could turn out to be just a small part of the largest oil discovery in 30 years.

But seven months later, the problem is still how to retrieve it. Petrobras has only three rigs capable of drilling in waters that exceed 6,500 feet, like the sites of the new fields.

Some drilling ships capable of drilling in arctic waters are now under construction. But that does squat for us for years. The problem is going to get far worse before it gets better.

Greg Meadows said at June 29, 2008 1:53 PM:


Yeah, I saw this coming 4 years ago. Demand outstripping supply gives only one direction
for oil prices to go and that is up.

People argue as if we have unlimited amount of time to get this problem under control.
But we are running out of time. That's why I think it is urgent to do whatever we can
do right now. No more delays. Unfortunately, I think the arguing will continue and the
problem will get much worse.

Part of the argument is renewables versus fossil fuels. I have come to see fossil fuels
as the bridge to the future. We need a strong economic base to provide the funds and
the stability needed for research and development for renewables.

But the argument seems to be driving us to the point of burning the bridge we need to
get to the other side. Once the economic crises begin, all bets are off. Anything
could and may happen.

c.o. jones said at June 30, 2008 11:23 AM:

OK, call this a little bit of a stretch, but if McCain is elected and we start to see a spike in the CPI due to energy costs, you can bet that he will tell the Border Patrol "no enforcement. None."

Why you might ask? Because he and Bernanke will figure that if enough cheap labor is introduced into the labor pool, quickly enough, it could cause some costs to drop (say, food) and have the effect of masking other inflationary pressures. Obviously, it can't work forever, and at some point other economic markers will start to look not so good (e.g. unemployment) but McCain doesn't care. As long as he has an excuse to keep the borders open, he's happy.

jcorn said at July 1, 2008 7:59 AM:

I liked reading the comments and the article. Some astute observations by your readers and a super article before I got to those. Thanks!

Post a comment
Name (not anon or anonymous):
Email Address:
Remember info?

Web parapundit.com
Go Read More Posts On ParaPundit
Site Traffic Info
The contents of this site are copyright ©