How Fuel Costs Have Affected the Airline Industry Essay

How Fuel Costs Have Affected the Airline Industry - Essay Example The aim of this paper is to discuss all of this, as well as all characteristics and factors involved in the matter of how fuel costs have affected the airline industry. This is what will be dissertated in the following. The six most primary airlines in the United States have been ailing since 2001; four out of these six were in fact forced to file for bankruptcy in 2005. According to some analysts, the entire airline industry is on the brink of collapse altogether; the primary cause being that of ever-increasing fuel prices. "It's very bad right now, it's unsustainable," said Kevin Mitchell, Chairman of the Business Travel Coalition based in Pennsylvania. "It's as bad as it gets. If (oil) goes up another couple of dollars it's going to be more of a pain but it's going to be hardly distinguishable from the pain that the airlines are feeling right now." (Delaney, 2006). In fact, according to Mitchell, the American airline industry basically refused entirely even to recognize the shift in the marketplace five years ago. "They failed to understand that consumers were demanding everyday, low, affordable airfares. The carriers in Europe recognized that and began to take action in 2001 and 2002 to become competitive with low-cost carriers. The US carriers were stubborn throughout the whole time, thinking that as soon as the economy would rebound, so would business travelers willing to pay $2500 for coast to coast fares, and of course that never happened." (Delaney, 2006). In fact Northwest Airlines, the nation's fourth-largest airline which is based in Eagan, Minnesota, has made many headlines since the year unfolded. "It reported $450 million in losses the first quarter of 2005, it's stock prices are declining, it's fuel costs are rising, it asked its labor unions to freeze their current pension programs in lieu of new contribution plans, it is attempting to cut annual labor costs by $1.1 billion, and on July 1 the union representing its mechanics authorized a strike vote." (Oo, 2005). The current spike in oil prices is especially taking its toll; taking the airline industry into uncharted territory and raising many questions about the economic viability of many players in the industry. Increasing fuel prices have also had effects on global trade, which is one of the United States' most profitable resources. "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," says a report entitled 'The Oil Crisis and its Impact on the Air Cargo Industry.' "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." (IAGS, 2006 ). Fuel expenses rank in as the number-one or number-two cost category in regards to the airline industry, and because of this, airlines have an enormous built-in financial incentive to reduce consumption;