I've written plenty of times about
the impact of high oil prices on U.S. airlines. But this is the
first time I've written about the way high prices may be helping
them.
This is, or could be,
happening in two ways. The first is not in dispute but the second
is open to debate.
The first: High fuel
prices are acknowledged as one of the biggest factors in U.S.
airline restraint in adding capacity.
"With oil in the
$70-to-$80-a-barrel range, it is making us very cautious about our
capacity plans," American CEO Gerard Arpey said last month in
discussing the airline's $291 million second-quarter
profit.
In good times, when
there's high demand and rising fares, airlines usually are eager to
order more aircraft or otherwise add more flights and seats to the
market. That may serve the interest of each airline individually,
but when they do it collectively, they flood the market with
capacity and must lower fares to fill additional seats.
But with fuel costs
high and unstable, airlines aren't confident in future profits.
They've been eliminating routes that once were marginally
profitable, and they've been more cautious about adding new
ones.
High fuel prices
contributed to the demise of Independence Air, which eliminated
some low-fare capacity on the East Coast, and to the Chapter 11
filings of Delta and Northwest, which led to the shrinking of those
carriers.
As a result, U.S.
airline capacity this June was 1.6% lower than in June 2005, and
the airlines filled more than 85% of their seats even though their
domestic fares, as measured in cents paid per mile, were 12.4%
higher. Those fares are still rising.
The capacity
restraint has been such an important factor in the recent return to
profitability that Subodh Karnik, ATA Airlines' COO, has said one
of his biggest concerns is that fuel costs will decline too
much.
Karnik, who
previously worked for Delta, Continental and Northwest, is worried
that a significant drop in fuel costs would increase profits so
much that bigger carriers would flood the market with capacity,
leading to lower fares.
The second possible
benefit of higher oil prices is what JP Morgan analyst Jamie Baker
calls "automotive substitution."
Baker's belief is
that with gas prices topping $3 a gallon, more customers are
deciding it makes more financial sense to fly than to drive on
short-haul air service they had been avoiding because of the
airline security "hassle factor."
As evidence, Baker
cites revenue increases on airlines' regional services. Revenue on
American's regional affiliates increased 25.1% in the second
quarter, compared with 10.7% for its mainline service.
The revenue per
available seat mile (RASM) for Continental increased 16.6% for
regional service, compared with 12.4% for its domestic mainline
service.
Baker also points to
the 17.5% increase in RASM at Southwest, which relies heavily on
short-haul service, although less so than in the past.
The problem with
Baker's theory is that airline executives aren't sure this is
happening, or, if so, how much.
JetBlue CEO David
Neeleman did offer this anecdote: A customer called a JetBlue
reservations agent recently to ask about a flight to Florida. When
told it would cost $89, he said he wanted to pay $69.
When the agent asked
the customer if he could drive to Florida for $89, he responded,
"Good point," and bought the tickets.
"High gas prices
certainly are not hurting us," Neeleman said.
At Southwest, CEO
Gary Kelly said his airline had seen some recent success with its
"fly, don't drive" promotions in short-haul markets.
But Neeleman, Kelly
and executives at other airlines said they weren't sure how much
benefit to attribute to automotive substitution, which is difficult
to ascertain and separate from other factors.
Even if higher gas
prices are driving more travelers to airlines, the benefits only go
so far.
BP's problems last
week with its oil pipeline in Alaska show how fragile the oil
market is -- it temporarily sent the price per barrel above
$77.
Further increases
would soon push fuel prices well beyond the point of diminishing
returns, and you can bet most airlines still would gladly trade the
benefits of higher prices for the cost savings they'd get from
lower prices.