Airlines Are the Canaries in the Coal Mine, and they are Dropping

Posted: May 22nd, 2008 by: h2

See how it unravels? The industries that rely on the balance between what they can pay for fuel and what consumers can pay for the end product are going to feel the oil peak prices first, and will fail first. Trucking is probably one of these industries as well, by the way, only it is not as discretionary as air travel so it should survive for longer in a recognizable form.

The cost of protecting airline bonds from default soared and bond prices plunged as oil reached a record $135 a barrel, stoking concern that carriers will run out of cash as jet-fuel prices surge.

A 94 percent increase in the price of jet fuel the past year may push some airlines into bankruptcy, Soleil Securities Corp. analyst James M. Higgins said yesterday.

“We now expect AMR [American Airlines] to have trouble avoiding bankruptcy by sometime in 2009,” Higgins wrote in a note to clients. “UAL [United Airlines] is too close to that possibility for our comfort,” and Continental is “close to our comfort threshold.”

Surging jet-fuel prices may help produce a record full-year loss for the largest U.S. airlines of $7.2 billion, JPMorgan Chase & Co. analyst Jamie Baker estimated this week. That estimate is 57 percent wider than Baker’s previous projection for the industry’s 2008 deficit.

James May, president of the Air Transport Association, told reporters yesterday in Washington that major U.S. airlines face liquidation should capacity cuts and fare increases fail to cover rising fuel costs.
Bloomberg: Airline Default Risk Soars, Bonds Tumble on Record Oil Prices, May 22 2008

The 11% cut in American Airlines flights this week is just the leading edge of many such increasingly radical changes in the air travel industry. The incredible dependence of all modern industrial economies, and global food production in general, on petroleum products, is going to become increasingly obvious once the oil production plateau we are on begins to drop off to the permanent decline in production that defines the essence of the peak production/decline scenario.

It will be interesting to see what happens as this continues. Obvious first casualties will be most commercial air travel, possibly the big three American car companies, who have waited far too long in developing good quality small cars to really be considered seriously as competitors for Honda or Toyota, or most European manufacturers for that matter.

Basically what we’re looking at now is the plateau of global liquids production, and since global industrialism has no realistic plan B for how to power itself, how to produce food, etc, without petroleum, it’s very understandably reluctant to admit the depth of the problem.

One thing is for sure, when the real declines start, after the plateau, the United States in in for a serious reality check (ASPO;Harpers: Our Phony Economy).

Short term, quarterly type corporate thinking and planning is going to be the long term loser in this game, and that leaves the United States with VERY few advantages, since it has so fully allowed the corporate system to dig itself deep into bed with the political. So where will the change come from?

My Predictions

When things get too obvious, I’m going to post predictions now and then. Some of these are virtually no brainers: state run airlines will return, since as the airline industry itself has now repeatedly stated, its business model cannot support such violent price increases (good article on airline fuel hedging), no matter how much hedging it does. At some point, after all, if the hedges worked one year, someone else lost that money, and sooner or later the number of people willing to take such losses will decline, until fuel cannot be hedged.

So if a country wants to have an airline in the future that can be counted on, and not let all that horribly out of place airport building go to total waste, some form of nationalization of air travel will need to be created. How the US will do this will probably be in the same typical style it’s been doing it all along: pay private companies and take all the risk, which means, subsidized fuel costs.

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