The survival of the commercial airline industry

Oil prices are beginning to moderate, which is bringing some financial relief to a domestic airline industry that has been ravaged over the past several months by high fuel prices. Many airlines had taken to implementing new fees, cutting routes, and reducing the size of their workforces in an attempt to offset the higher fuel costs, while other airlines have ceased operations altogether. But it appears that, for right now, the worst might be over:

Oil prices, which triggered the crisis in the first place, have fallen even faster over the last five weeks than they rose during the first half of this year. Since peaking above $147 a barrel on July 11, oil has fallen to $115. That's the fastest, most dramatic decline in history.

And though most carriers still can't turn a profit at existing jet fuel prices, they're getting close to the break-even point.

Another $10 to $15 drop in the price per barrel, which some oil experts now say is possible, will have most of them back in the black. Analysts at both Morgan Stanley and JPMorgan Chase even are suggesting that the haggard industry could be profitable in 2009.

Eh, let's not get too confident about 2009 just yet. While the current downturn in oil prices might be welcome relief, it could very well be nothing more than a temporary respite brought on by seasonal changes (such as reduced oil demand due to the end of the summer driving period) or recent fluctuations in the value of the dollar. The overall conditions that lend themselves to high oil prices - tight supplies, surging demand in China and India, instability in producer states like Iraq and Nigeria - remain.

Which brings up a question: if oil prices climb upward once again, which airlines are likely to survive, at least in the near term? A usatoday.com article analyzes the financials of the ten largest domestic carriers and classifies them into three categories: strongest, likely to survive, and struggling.

The "strongest" airline is Southwest. No surprise there; Southwest has posted a quarterly profit every cycle since 1991. No other airline can come close to making that claim.

American, Alaska, Continental, Delta and Northwest fall into the "likely to survive" category. The article says that the strengths of Houston-based Continental are its strong cash position for its size and good hubs in Houston and Newark, but that its weaknesses are its lack of equity in its own aircraft and its lack of a strong presence in major foreign destinations. All things considered, the hometown airline seems pretty healthy. Northwest and Delta, for their parts, plan to strengthen their position by merging into a single airline.

Then there are the four airlines in the "struggling" category: AirTran, JetBlue (which was the rising star of the domestic airline industry until the Valentine's Day Massacre eighteen months ago), United and US Airways. Denver-based Frontier, which is currently operating under bankruptcy protection, would likely fall into this category as well. If the current respite in high oil prices doesn't last, any or all of these airlines could collapse.

Of these four, I think United is probably the most likely to go under another wave of sustained high gas prices occur. The Chicago-based airline's 14.1% ratio of cash to revenue is the lowest of the ten carriers surveyed, and friction between labor and management (especially embattled CEO Glenn Tilton) could grind the airline to a halt if its financial situation deteriorates. The fact that they've decided to begin charging for meals on international flights reeks of desperation, and this story (via m1ek, who describes United as "an airline that needs to die, as soon as possible") certainly doesn't make me want to fly them anytime soon. Needless to say, I'm glad that Continental decided against merging with this struggling airline.

There comes a point, however, when oil prices become so high that no airline's business model is sustainable:

Despite recent fluctuations, a growing number of economists are bracing for oil to hit or surpass $200 per barrel in a few years, and most industry analysts agree with Douglas Runte, of RBS Greenwich Capital, who told The Wall Street Journal in June, "Many airline business models cease to work at $135-a-barrel oil prices." After all, most airlines barely figured out how to be profitable in a world of low fuel costs. Jeff Rubin, chief economist of Canadian investment bank CIBC World Markets, has predicted that gasoline will hit $7 per gallon by 2010, forcing some 10 million cars in the United States off the road. If that happens, he told me, "You're going to see an even bigger exit in the airline industry."

The long-term effects of sustained high oil prices would have a horrendous effect on commercial aviation, both at home and abroad. Air travel would revert to a means of transportation exclusively for the wealthy. Tens of millions of others who can afford to travel by air today would no longer be able to do so. The commercial airline industry would shrink dramatically and become a fraction of its current size as all but perhaps a couple of airlines cease operations. Millions of people working in civil aviation and affiliated industries worldwide would lose their jobs. The global tourism industry would also suffer as families are no longer able to fly to Cancun or Disney World for vacation. Services that we take for granted today, such as relatively inexpensive overnight shipping by air, would disappear. The overall effect on the worldwide economy would be enormous and devastating. What's more, while places like Europe and Japan have high-speed, electrified rail networks that could take the place of air travel for at least some percentage of trips, the United States, outside of the Acela Corridor, does not.

What's alarming is that, should $200/barrel oil become a long-term reality, there really isn't much that can be done to prevent this from occurring:

Is there a way to avoid this fate? I reached Richard Gilbert, one of the analysts warning of a potentially drastic decline in U.S. air travel over the next two decades, as he was returning from a meeting in Toronto with the U.S. Transportation Research Board, a government research body. I asked him what sort of response he gets when he discusses his book with industry insiders. "You see three arguments," Gilbert told me. "One is that ingenuity, American or otherwise, will overcome the problem in terms of oil prices. The second is that we'll wrestle it to the ground with technology. And the third type of response--and this one doesn't have a specific argument--is that this just can't happen."

It's always dangerous to bet against human ingenuity. But, while most of the technology needed to replace gas-guzzling cars with, say, plug-in hybrids either exists or sits just over the horizon, decarbonizing air travel is a much harder prospect, not least because of the massive amounts of energy needed to lift a large passenger plane in the air. The industry has already boosted the fuel efficiency of jets 70 percent in the last four decades, and is now left sanding down the rough spots--tinkering with ultralight materials, flying more slowly, or even charging passengers for extra bags. Propeller planes use less fuel than jets but are only really viable for some short-haul flights. Engine manufacturers say that more advanced technologies like fuel cells and carbon capture are still technically infeasible, while "blended wing" designs--planes shaped like stealth bombers to reduce drag--have barely left the drawing board. Improvements in air-traffic control will reduce both the length of flights and fuel-wasting delays, but may not be enough to surmount $200-per-barrel oil.

Virgin Airlines CEO Richard Branson has held out high hopes for jet biofuels, though spikes in food prices and massive deforestation have dimmed ethanol's star. Someday we may get solar-powered jets or hydrogen fuel cells, but, as the Intergovernmental Panel on Climate Change concluded in its landmark 1999 aviation study, "There would not appear to be any practical alternatives to kerosene-based fuels for commercial jet aircraft for the next several decades." The military may be one exception: The Pentagon, worried about peak oil scenarios, has pushed to fuel its Air Force with liquefied coal, which may keep fighter jets aloft, but would have horrifying climate consequences if used on a broad scale.

For now, however, recent adjustments made by the airlines, as well as the downward turn in oil prices, have created a rosier outlook for a commercial airline industry that until just a few weeks ago was facing gloomy prospects. Returning to the original article:

JPMorgan analysts Jamie Baker and Mark Streeter told investors in an Aug. 12 report that the "industry today is a significantly different one than that which gave us pause last March."

It's not just because jet fuel prices have fallen by more than $1 a gallon from their early summer peak, though that change by itself will save the industry more than $13 billion annually. The carriers' recent capacity cuts, decisions to ground old, fuel-inefficient planes and to boost revenue via higher fares, and the imposition of new and larger fees are likely to be long-lasting changes, Baker and Streeter wrote.

That means that instead of focusing on "the potential magnitude of the fuel-induced cash burn, capital and liquidity options, and who might disappear, and when," as Baker and Streeter did during the first half of this year, they now are "assessing who might first return to annual profitability, and when."

I'm certainly not looking forward to a world without the convenience of inexpensive air travel, so I'm rooting for the airlines to return to profitability (and for some of them to get their act together as well). But the commercial aviation industry is at the mercy of the very resource that fuels it; they have no alternative. Future surges in oil prices are likely, if not inevitable, and there will very probably come a point, someday, where the survival of the commercial aviation industry as it currently exists becomes uncertain. No amount of service cuts, layoffs, or fees on pillows, blankets and baggage will make a difference.

But what's going to happen to Sammy LaCorte?

The decision by the Finger family to rebrand their local furniture business means that yet another hometown brand is disappearing. Fingers Furniture Co., a Houston presence for 81 years, is assuming the identity of Wisconsin-based Ashley Furniture. The Houston Press, which is obviously going to miss those Fingers commercials on the ten o'clock news, is not impressed:

"Ashley"? Sounds pretty damn sissified to us. Give us a tough-talking, digit-pointing, oddly enthusiastic, strange-haired guy telling us something is "at your fingers," not "at your Ashley."

I can't say I'm too thrilled about the decision, either, just as I wasn't too enthused when the Foleys name was replaced by Macys. Every time a local brand is replaced with a national one, a piece of the city's history disappears with it. But business is business.

Fingers currently operates four local stores, including their massive, 250,000-square-foot showroom at the corner of Gulf Freeway and Cullen, across the Freeway from the University of Houston. That building sits on the site of Buff Stadium. The Buffs, a minor league affiliate of the St. Louis Cardinals, were the city's baseball team until the city was awarded a Major League franchise - then known as the Houston Colt .45s and now known as the Astros - in the early 1960s. There is a small sports museum inside that furniture store, located where home plate of Buffs Stadium used to be. Hopefully, the museum - very few people know it even exists - will be spared by any renovations that happen as the building is transformed from a Fingers to an Ashley HomeStore.

I drive past this store frequently because Combat Kroger is located in the same area, just a few blocks further down Cullen from the freeway. In the parking lot in front of the Fingers store is a huge four-sided sign with a marquee on each side. The marquees facing Cullen and the Gulf Freeway are generally regularly updated to announce sales, new furniture shipments, and the like. The marquee facing the store itself, however, has said the same thing for years: CONGRATULATIONS SAMMY LACORTE, SALESPERSON OF THE MONTH.

Sammy LaCorte must be a really good salesperson if they never have to change that marquee! (For the record, at least one internet reviewer likes him.) Hopefully Sammy, and the rest of the employees at the Gulf Freeway Fingers, will not be adversely affected by the rebranding.

Wrong Birmingham!

Seriously, how could a mistake like this not get noticed ahead of time?

Britain's second-largest city, Birmingham, has a new skyline — only it belongs to its Alabama namesake.

Birmingham City Council distributed 720,000 leaflets that praised residents for exceeding recycling targets, carrying a message that read: "Thank You Birmingham." The message appeared stamped across a photograph of the city's skyline. But the photo was not of Birmingham, England, but of Birmingham, Alabama.

A little QA/QC is a good thing, folks.

Anyway, I always knew that Birmingham, Alabama was named after Birmingham, England. But I never really gave much thought to other ways in which the two cities are similar:

While the cities have wildly different skylines, there are many similarities between the two - not least a proud industrial heritage.

Birmingham, Alabama - known as the Magic City because of its rapid 20th century growth - was founded on its steel industry. It took its name from the British manufacturing city known for making Jaguar cars and Cadburys chocolate. Both now have growing financial services sectors.

Both cities also share a history of racial tension. In Alabama, Birmingham was a center of 1960s civil rights protests by black Americans. In Britain, Birmingham has struggled with divisions between black and South Asian communities, which led to violent riots in the 1980s and in 2005.

The British city — whose sister city is Chicago — has a population of 1 million. The Alabama city's population is roughly 230,000.

Interesting. But it still doesn't excuse the mistake.

UPDATE: John's take is here. Thanks for the backlink, John!

Widespread dust

A couple of days ago a dust cloud descended upon Dubai. Of course, this is not exactly an uncommon weather phenomenon here. Visibility was reduced, but not overwhelmingly so. The dark sky and blowing wind reminded me of what it sometimes feels like in Houston when a thunderstorm is approaching. At least the dust kept the temperatures down; the day's high topped out at only 99 F!

Watching the Olympics

At my hotel I can follow the Olympics in any of three languages:

a. Arabic,
b. German, or
c. Italian.

This isn't so bad, however, because I don't have to sit through NBC's inane, annoying and commercial-laden coverage of the Games.


It's worth mentioning that even the Arab announcers on Abu Dhabi Sport are absolutely fawning over Michael Phelps.

Rotation five

Dubai again. At the rate my passport filling up with UAE entry and exit stamps, I'll need a new one before too long.

The trip out here was not quite as much of a hassle as the last one; I didn't really get any sleep this time, but Delta's in-flight entertainment system managed to not crap out until the flight was almost over so I got to watch a movie and listen to some music to pass the time. I was also treated to an awesome view of Paris as our flight path took us just south of the city. Even though I've never been to Paris, I was able to recognize some of the landmarks rather easily, even from 37,000 feet up: "Oh, look, those towers down there must be La Defense... If I follow that axis, I should see the Arc De Triomphe - there it is, right there - and the Champs Elysees... And if I look across the Seine from that point, I should find the Eiffel Tower... There it is!" Baron Haussmann would be proud. I really wish I had my camera with me so I could have taken some pictures.


Within the span of three months Delta has raised their drink prices from $5 to $7. At this rate, they'll be charging $10 for a beer before the year is out.

The good news is that the office here has accomodated my request to stay in a hotel within walking distance, which means that I don't have to wait in the hot sun for taxis anymore. Of course, the only reason they were able to accomodate me at this particular hotel is because the hotel is offering an August special (August is a particularly slow month for tourism in Dubai) which brings the price to within our budget; it's unlikely that this special will still be available if I come back in September or October. But I'll take it for right now.

One of the project managers here is going on vacation at the end of the week and wants to tie up as many loose ends as possible before she departs, so I imagine things are going to get busier as the week progresses. And I still need to have serious negotiations with those in charge as to what it will take for me to make any more trips out here this year. But otherwise, things at work seem to be going smoothly, at least so far. I even had a productive meeting with a client yesterday, for a change!

Katherine Jane Johnston 1940 - 2008

I can't say that I knew my Aunt Jane especially well; she divorced my uncle when I was still young and lived in Oregon for most of my life. Last Thanksgiving was the first time I had seen her in years.

Jane, who had relatively recently moved back to her childhood home in northern Oklahoma, had been in an Oklahoma City hospital - ironically, the same hospital where she studied to become a nurse - to repair an aeortic aneurysm. My parents had gone up there to visit her just a couple of weeks ago. Unfortunately, something went horribly wrong during one of the surgeries to repair the aneurysm.


This is probably not the entire obituary, but the Blackwell Journal-Tribune requires a paid subscription to access their archives so this is all I was able to get. I'll revise this entry if I get a full obituary.

Katherine Jane Johnston, 68, of Blackwell, formerly of Corvallis, Ore., died Aug. 7, 2008, from surgical complications at St. Anthony Hospital in Oklahoma City.

She was born Feb. 17, 1940, in Blackwell to Hal and Rena Sommers Wilkins. She graduated from Blackwell High School in 1958 and graduated from St. Anthony Hospital as a registered nurse in 1961.

Her body was cremated. An informal memorial will be 1 p.m. Aug. 10 in the fellowship hall of the First United Methodist Church at Sixth and Coolidge in Blackwell.

Right now my thoughts are with my cousins Laura and Ellie. With the span of less than one year, they have lost both their father and their mother.

There goes Edouard

Tropical storm Edouard made a slight detour Monday night, making landfall north of Galveston early Tuesday morning and sparing Houston a direct hit. Not that it would have mattered; the storm simply wasn't that strong and, other than some localized flooding, did not cause any major damage as it passed to the north and east of Houston and into the center of the state to dissipate.

Truth be told, Edouard was an enjoyable storm. The cooler-than normal temperatures, the rain and the blowing wind made it feel less like an early-August tropical storm and more like a late-September cold front. Lori got a day off from work, and our yard got a few inches of badly-needed rain. (Besides, having literally gone months without seeing rain, it was actually something of a novelty for me!)

I briefly entertained myself Tuesday morning by flipping back and forth between channels, watching the local news coverage of Edouard. The local stations tried valiantly to justify the hype that they were devoting to the storm, with anchors and meteorologists desperately continuing to insist that conditions "could yet become dangerous" and field reporters pointing to windblown road signs, puddles of rain in parking lots, and even (in Channel Two's case) bark blown off of trees as evidence of Edouard's fury. It would have been funny if it weren't so pathetic. As the Houston Press's Richard Connelly notes:

Everyone complains about TV coverage of potential hurricanes, of course. But if the hype keeps going -- turning a tropical storm/possible cat 1 hurricane into Katrina Redux -- than at some point people are going to stop paying attention. They'll simply remember TV reporters out there talking about swaying trees as if it was evidence of a real storm.

And then you might see a real disaster.

Exactly.

Local media histrionics aside, Edouard was a reminder for that we need to be prepared, because the busiest part of hurricane season has only just begun. For now, however, it's back to the droning heat of August in Houston.

Here comes Edouard

A tropical system formed rather suddenly off the coast of Louisiana over the weekend and is now headed this way. Edouard will probably be a strong tropical storm or even a weak hurricane when it makes landfall sometime tomorrow. As of late this evening its projected track takes it right over Houston:
There is, however, a possibility that its track could be shifting to the east. We won't know for sure until it makes landfall sometime in the early afternoon tomorrow.

Of course, the approaching storm has predictably sent the local news media into their usual frenzy, and the evening TV news broadcasts have all contained the obligatory footage of people stocking up on bottled water at the grocery store and boarding up windows on beachfront homes. But even the local media know that there's only so much hype they can render to what just isn't likely to be a particularly devastating storm. The winds and storm surge generated by Edouard are not expected to be severe, and as of this evening no mandatory evacuations have been ordered, even in beachfront communities.

This isn't to say I am taking the storm lightly. While I do not expect damaging winds to reach my house, I am concerned about flooding - we all know what tropical storms can do to Houston - and there's always the chance that wind gust could be strong enough to knock down power lines, leaving us without electricity for a few days. That's a real concern, given that Houston in August is unbearable without air conditioning.

But I'm not especially worried. We're stocked up with water and batteries, we're not in a floodplain and we're not required to be anywhere tomorrow: Kirby's daycare is closed, as is Lori's office, and I work from home a lot of the time anyway. So we're just going to spend the day here at the house and hope that the power doesn't go out.

Everybody stay safe and dry. I'll post an update as I am able to do so.

Putting my foot down

Another exciting edition of my least favorite month is upon us. As was the case two years ago, I'll be spending most of it over in Dubai, where it is even hotter than it is here in Houston.

But it's good to be back home again, for at least a few days. As I mentioned in a previous post, the constant travel is beginning to take its toll - not just on myself but on my family as well - and I'll be glad when it's finally over. So you can imagine the wave of disgust that crept over my body when I received a work e-mail a couple of days ago that started like this:

Hey Thomas, when's the earliest you think you could return to Dubai in September?

I think this is the point where I need to politely put my foot down. I know Dubai is where the work is right now, I know my project managers can't be faulted for the fact that our clients are completely unorganized, and I know I agreed to help out. But this is beginning to get ridiculous. Originally, I was looking at a project assignment schedule of April through June. Then July and August were added. Now they want to tack on September and October. It's like I'm being taken for granted, and it's really not fair to me or my family.

So I've made a decision: if they really need me, I'm willing to compromise. Shorter trips with more time between them - instead of spending three weeks in Dubai and one week in Houston, it should be the other way around - and a hotel within walking distance of the office so I don't have to screw with the taxis anymore. I've already put in my time and I think these are reasonable requests. If they can't accommodate me, they need to find somebody else.