Hello Martin

So this week proved to be rather hard on US Airlines. Aloha Airlines had to shut down after being in operation for more than 60 years, ATA airlines, SkyBus and champion Air (charter only) followed suit. The major excuse was rising fuel costs, and low cost airlines competing in the same markets.

So before i go further, i’d like to take a look at the rising fuel cost first.

Oil has obviously been hitting unprecedented levels compared to previous levels (with inflation accounted for, which peaked at $104 Dec 1979), March represented the first month ever with a continuous closing price of over $100. What’s interesting regarding Oil prices is that lately more and more researchers have been crediting the continous high price of oil primarily due to speculation in Oil rather than demand. That makes more and more sense, US is the largest consumer of Oil, consuming around 25% of all Oil used on a daily basis (but only representing 4.8% of the world population). China have had a surge of increased Oil use, both on a commercial (manufacturing) and Personal (people buy cars), however China’s largest export partner is the US. However due to the strenghening Yuan compared to the Dollar, China has seen a slowdown in growth the last few months compared to previous quarters, since Chinese manufactures can’t raise their prices to offset the weakening dollar, and compete with other countries where their currencies might be tied to the dollar.
Since US is coming in to a possible (i.e) recession, there should be a slow down in the use of Oil. A US recession will hit china’s growth hard considering the huge export, Walmart for instance gets around 80% of their products from China (Another reason i don’t get why American’s say there should be taxes on products from China… they would only shoot themselves in the foot). Businessweek ran a story this issue regarding how many manufacturing plants had to be shut down due to the rising cost of labor, Oil and currency. China will be fine in the long run, since the alternatives can’t stack up, India and Vietnam are the 2 most used examples, Vietnam works in the short term, but due to the size of the country, relative wealth will spread quickly and drive up salaries, India is different ballgame, but the infrastructure isn’t as well established as in China.

So this means that the largest economy on earth will see a major slowdown, which should effect Oil, and the largest growing economy on earth will see a major slowdown in their growth due to the issues in the US, not to mention as previous post pointed out the increase in food prices will slowdown the “luxury” items in China, which a Car currently qualifies as.

The above is all well documented but if it will change the pricing of Oil, i don’t know.
Common sense says the use of Oil should drop or stay the same though.

So back to the Airline business, most Airlines hedge their fuel costs to a certain extent to be able to project costs. Southwest most famously pays $49 per barrel for 65% of their Fuel in 2008. Obviously a fantastic deal for them, hedging fuel has not always been a large part of running an airline, but have been used more and more the last few years due to the high volatility of fuel prices.

Ryanair’s hedge just ran out which increased their fuel cost with an estimated $400m, impacting the highest profit margin in the industry (around 20% net margin, Gol, AirAsia are, 2/3d).

2007 was a stellar year for the Aircraft manufactures though, Airbus delivered 453 planes, whilst Boeing came close second with 441. And a record 1413 aircraft where ordered from Boeing, and 1341 from Airbus. The airline industry was delivering their first profit statements since 9/11 and the market for aircraft both on the buy and lease side was dried up, and drove up the pricing of especially the leasing market.

With the 4 Airlines going out of business this week, a total of 78 Aircraft was given up. That’s a lot of aircraft, especially in a market like this. SkyBus on top of their 12 Airbus A319 Aircraft’s which is most likely the most lucrative planes of all the one’s that’s becoming available due to being almost brand new and a popular plane for low-cost airline operators (EasyJey and Virgin America as two examples), also had a staggering 63 aircraft orders to Airbus (Worth at list price $3.7 Billion).

So where am i getting at, i think someone should start an Airline.
Someone called me crazy for the thought, primarily for starting an Airline in the current fuel market, but just as Southwest was called crazy for hedging their fuel costs in the start of 2000, i think someone can hedge their lease cost of aircraft and hope that fuel costs goes down (Worth pointing out though that fuelcost is a larger operating cost for airlines, than the dry aircraft cost). But still, i hope someone is willing to take the risk, and jump to setup a new airline. Maybe a new low cost airline from Dubai to Europe or Asia (Relatively low cost of fuel, compared to western world).

David Neeleman the founder of JetBlue, announced he would setup a new low-cost airline serving Brazil, he seems to have settled on using Embraer 195. So that removes the possibility of him using the newly available aircraft’s since they primarily Boeing planes.

Anyway end of the rant, do i think someone will start a new airline, not really, do i think it would be fun if someone did. Yep, do i realize the huge risk involved, probably not, but hey that’s why there is crazy people with crazy money out there.