This week the airlines were in the news with their massive personnel cuts and downsizing plans. See: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=als_9FvReWTY Something just didn’t seem right. The reason given for cutting jobs, schedules, and increasing fares by up to four times the previous prices just didn’t add up. Being the financially oriented guy I am I decided to do a little research. Here is what I found:
One of the most popular airplanes is the Boeing 737. Southwest Airlines has built its business model around the 737. Other low cost carriers have done the same. I have flown hundreds (maybe thousands) of flights in a 737. The following numbers represent estimates based on practical views of the "fuel issue".
The burn rate of fuel for a Boeing 737-4 is 792 gallons per hour. Source:
http://www.pbs.org/wgbh/nova/teachers/activities/3203_concorde.html
The cost per gallon of jet fuel on May 30th, 2008 was $3.826. Source:http://www.iata.org/whatwedo/economics/fuel_monitor/index.htm
So, let’s look at the economic comparison versus one year ago:
Oklahoma City to Kansas City on Southwest is approximately 1 hour of flight time.
Current year cost:
There are about 122 maximum seats on the flight. I have been passenger 122 before. It was ugly in the very back of the plane!
On a full flight, the cost of fuel to Kansas City was approximately 792 gallons x $3.826 = $2,996.93 or $24.56 per passenger.
On a 61 passenger flight the cost was $49.13. However, this summer I have not been on a flight half full, most flights were 100% full.
Last year cost (1.99 per gallon):
Full flight: 792 x $1.99 = $1,576..08 or $12.92 per passenger.
61 passenger flight: $25.84 per passenger
Increase in fuel cost per passenger: Full flight- $11.65 Half full flight- $23.29
CONCLUSION:
The airlines can easily raise fares by $25 per ticket. They do it all the time. We are being misled to think that their cutbacks are due to the "fuel crisis". It would appear that they are using the "crisis" to trim staff, eliminate marginal routes, and erase expansion/aircraft mistakes. What can the employee unions do about a crisis? Would they dare strike when everyone knows the losses are due to the price of a gallon of jet fuel?
Let’s assume that my calculations are off by 100%. A $50 increase would still cover the increased jet fuel cost.
The price of oil will become the excuse for business to downsize and cut staff in many industries. Inflation actually helps wholesale distributors’ profits. Current inventory bought at lower prices but sold at higher inflation pricing levels increases the bottom line. Once again we are given convenient excuses for higher costs and worse customer service. My heart goes out to the airline employees who lose the job because of this.