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Airbus And Boeing face a dark and painful future
Kristen Lagadec, Global Public Media
When you google ‘Airbus Boeing Peak Oil’, the top result is this article that I wrote in the summer of 2006. Being a Cassandra proved right gives one all sorts of uneasy feelings, but I will carry on in that direction and offer a revised version of my prophecy, adorned with new details.
In a nutshell: people are talking a lot about the difficulties for airlines with $150-a-barrel oil. But we also have to understand that it is going to be much worse for aircraft manufacturers. They probably know it; but they cannot believe what they know, and they cannot say it either. This is not just another crisis for air transportation and aerospace construction: this is the last crisis until the end of the fossil fuel era.
Hard times for airlines
First an important premise: there are no serious alternatives to jet fuel for airliners. And even if there were, they could never be cheap in a world of expensive energy.
… The obvious consequence is that cheap flights are gone for good. We are currently witnessing a fast concentration of the market, because the fierce competition prevents airlines from transferring the whole fuel bill to their passengers. As the weaker players exit the arena, ticket prices will rise until the few remaining airlines can break even financially. We will see a trend of de-democratization of air travel, and people will gradually change their travel habits, starting with the poorer and newer travelers.
… I also see a final, more tricky contributor to airline misfortunes: many airlines have based their financial model upon the resell value of their aircraft. Planes are a huge investment, with a long lifetime — a bit like homes. Maybe you see what I am hinting at. Just as the housing crisis brought many people to bankruptcy, many airlines will lose their financial footing when the industry’s obvious overcapacity and gloomy outlook pulls the market value of second-hand aircraft down. All this will contribute to reduce air traffic over the next decades, to the levels of the 1990s, then the 1980s, then the 1970s …
… In short: airlines make money in proportion to air traffic; aircraft manufacturers make money in proportion to air traffic growth. In a world with negative air traffic growth, the former float, the latter drown. Therefore, although we will probably not see the end of air traffic any time soon, this extremely nasty leverage effect will make aircraft manufacturers suffer considerably.
… Admittedly, a handful of airlines will be a position to buy the new planes. When all the world’s money ends up in oil exporters’ hands, they have to buy things from us to avoid drowning under the heap of green bills. Aircraft are a great choice, as they are both hard-currency-intensive and fossil-fuel intensive, which oil producers have a lot of, as per design.
… I do not know what the smartest move for aircraft manufacturers is, and I am glad I am not in Tom Enders’ or Scott Carson’s shoes. Publicly acknowledging that the air travel industry is on the brink of inevitable decline would discourage investors and hasten the fall. And yet, the earlier they can start downshifting, the smoother the forced landing.
(1 July 2008)
According to her blog, Kristen Lagadec (aka mandarine) is “a married French aerospace engineer, born in 1974 near Paris, and currently living in the southwest of France.”
Big job cuts announced at American
Micheline Maynard, New York Times
American Airlines expects to cut nearly 7,000 employees by the end of the year, or about 8 percent of its worldwide work force, as it reduces flights and grounds aircraft because of high fuel costs, the airline told employees Wednesday.
… “These are difficult but necessary changes given the unprecedented challenges we face with overcapacity in the industry, skyrocketing fuel prices, and a worsening U.S. economy,” said Tim Wagner, an American spokesman.
(3 July 2008)
Car sales at 10-year low
Bill Vlasic, New York Times
Sales of new cars and trucks plunged to their lowest level in more than a decade in June, as high gas prices and a weak economy kept American consumers away from dealer showrooms.
With the drop last month of more than 18 percent, automakers now expect to sell well below 15 million new vehicles this year, far fewer than the norm this decade of more than 16 million vehicles a year.
Detroit automakers were hit hard.
(2 July 2008)
SUV drivers burned twice: at the pump, on the car lot
Annys Shin, Washington Post
Americans’ love affair with 22-inch rims, eight cylinders and four-wheel drive wrapped in an 8,000-pound package is over. And the breakup is going to cost.
With $4-a-gallon gas coming between drivers and their very large vehicles, consumers are dropping their once-beloved rides, fast. But not fast enough, it seems. As the price of gas has gone up, the value of sport-utility vehicles has gone down.
In the past six months, the price of a used Chevrolet Suburban has dropped as much as $8,000, said Mike Parker, manager of used-car sales at Lustine Toyota/Dodge in Woodbridge.
(2 July 2008)
