High Oil Prices Endanger Future of Airline Industry

The current spike in oil prices is taking the airline industry into uncharted territory and raising questions about the economic viability of many players in the industry.

Published: 01-May-2006

The current spike in oil prices is taking the airline industry into uncharted territory and raising questions about the economic viability of many players in the industry. In order to protect itself, the airline industry must support initiatives to reduce oil consumption in the ground transportation sector, where most oil is consumed. This is the conclusion of a study prepared by the Institute for the Analysis of Global Security (IAGS) and presented before leaders of the airline industry in Beijing earlier this month.

The report, entitled "The Oil Crisis and its Impact on the Air Cargo Industry," presents a grim outlook for the future of the global oil market stemming from a combination of increasing volatility in major oil producing countries, geological depletion, terrorism, lack of investment and frantic weather patterns. It suggests that oil prices, currently hovering near $75 a barrel could double should a combination of unfortunate events occur.

"No doubt increasing oil prices are likely to dampen global trade. Air cargo traffic is a leading indicator of any economic slowdown. The air cargo industry itself, in which fuel accounts for 20-30% of the operational cost, is poised to be the prime casualty of the new era of expensive oil," the report says. "Jet fuel prices have almost tripled in the past four years. As a result, the world's airlines spent over $100 billion on fuel in 2005, a 50% increase over 2004. At reasonable oil prices of $30-$40 a barrel, world air cargo traffic was projected triple over current traffic levels." But the recent market conditions suggest a more modest growth.

"The air transport industry is among the most efficient of all the energy intensive sectors of our modern economy," said Dr. Gal Luft, IAGS’ executive director who presented the report's findings before the Annual Executive Meeting of the International Air Cargo Association. "The industry has been able to increase its fuel efficiency by 1% a year for the last three decades, which translates to a saving of about 80,000 gallons of fuel for every plane every year. A further 20% improvement in fuel efficiency is projected by 2015. Such progress has been achieved through a combination of technology, improved air traffic control and better practices." Though Luft was skeptical about the prospects of biofuels for jet engines in the foreseeable future he was confident that producing synthetic jet fuel from coal and natural gas could provide some relief. "Planes flying out of Johannesburg airport today are already being fueled by semi-synthetic jet fuel made from South African coal. There is no reason why other countries rich in coal like the U.S., China and India should not follow suit."

"While the airline industry is doing all it can to minimize costs by reducing its fuel consumption, it has little influence on overall demand and global oil prices. Air transportation accounts for only 6% of the world's demand for refined petroleum products." Luft said. "Being a marginal consumer with limited capability to affect global oil prices the air transport industry should look beyond minimizing its own fuel bill. The industry should seek ways to affect the market at large and help reduce oil prices. The sector where substantial oil savings can be achieved, in sufficient quantity to drive down oil prices, is ground transportation. This sector alone consumes over half of the world's refined petroleum products. Therefore, in addition to all the internal measures the airline industry has taken it should also support from the outside policies aimed to increase supply and reduce demand for oil in the ground transportation sector."

The full report is available online at:  http://www.iags.org/aircargo406.pdf

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