$100-a-barrel Oil

Today I read an interesting article on $100-a-barrel oil at Businessweek's website. The possibility of $100-a-barrel oil definitely hurts the airlines and the trucking industry and seems to be a boon to oil & gas exploration companies and railroads (which are much more fuel efficient than trucking companies). However, I wonder what this will do to the business aviation market. Obviously it becomes more expensive to operate aircraft, but a 50% to 100% increase in fuel prices doesn't necessarily make it prohibitively so. Also, the price of flying commercially will increase and this tends to be the baseline comparison for supporting the "cost advantage" of business aviation. The other, and perhaps more important, advantages are: security, time, flexibility, and safety.

It really will not be difficult to make the assumption that a justifiable decision to use business aviation at $50 or $70-a-barrel will be justifiable at $100-a-barrel. This will benefit the manufacturer's who are producing new composite aircraft such as the Beech Premier I, the Hawker 4000 (if it's ever certified), the Challenger 300, and the new Falcon. It may also help the turboprop market (King Air's, PC-12, and TBM700)in their quest to fight off the faster yet more fuel hungry VLJ's.


Exceprt form the BusinessWeek Article:

Going from producers to a key consumer, what effect would $100 oil have on the airline industry?

A further significant increase in oil prices would hit U.S. airlines hard, probably aborting the current earnings recovery and conceivably endangering the survival of one or both bankrupt airlines, Delta Air Lines and Northwest Airlines. U.S. airlines have already seen fuel prices rise dramatically over the past several years.

Jet fuel averaged about 80 cents per gallon during 2000 to 2003, but rose to $1.50 per gallon in 2005 and $1.95 per gallon during the first five months of this year. Most airlines have limited fuel hedges in place because the high and volatile oil and jet fuel prices make such strategies expensive. Moreover their poor credit profiles often necessitate posting cash collateral to enter into swaps or other derivative transactions.

Airlines have been able to raise airfares over the past year, largely offsetting the higher fuel prices. This has been made possible by strong demand—reflecting the healthy economy—and reduced supply (significant reductions in flights, mostly in the domestic market, by bankrupt airlines).

However, a move to $100-per-barrel oil would drive fuel costs beyond what could be recovered in higher airfares (as happened in the fourth quarter of 2005, when hurricanes shut down refining capacity in the Gulf region, causing jet fuel prices to spike sharply). Furthermore, high oil prices could well slow the U.S. economy, eroding pricing power for airlines.