With oil prices doubling in a year and hitting record highs, airlines are cutting flights, charging extra for everything they can think of, or just going out of business. Earlier this year travelers on Aloha and ATA were left wondering how the airline they took while on their vacation could go bankrupt so quickly – before many could catch their return flight. So far this year, six U.S. carriers have shut down or filed for bankruptcy.
As the age of inexpensive oil comes to an end, there will be major adjustments, disruptions and shocks. The disruption to automakers has gotten extensive coverage this year. The price shock at the gas pump is causing a major shift in car buying, with SUVs and pickups sitting unsold on dealer lots, pushing GM and Ford stock down at least briefly into single-digit territory. Last month GM’s stock was lower than at any time since 1954.
Now the oil shock is starting to take a toll on Boeing. Since last July, Boeing stock has fallen from more than $107 a share to under $65 due to continued 787 delays and concerns that airlines would slow new orders and delay or cancel existing orders. If airline orders do slow for long, the adverse consequences to Washington state’s economy as well as Boeing will be significant.
There is unpleasant irony in this. Boeing is getting ready to launch the most fuel-efficient commercial airplane ever made – the lightweight, composite-fiber 787 Dreamliner. In the first quarter, Boeing’s per-share earnings rose 43 percent on revenue of $16 billion, and operating cash flow more than doubled to $1.9 billion. With the company’s backlog of orders at a record $346 billion, investors should feel good about Boeing.
But pessimism about oil prices is growing. And with it there’s pessimism about the future of air travel, airlines and airplane makers. The International Energy Agency has warned that global oil supplies will remain tight with faltering oil production and continued strong demand from developing countries such as China. The IEA said future production outside of OPEC will be “paltry,” and OPEC spare capacity will fall to “negligible levels” in 2013.
What can be done? First, we need to replace oil in new cars and trucks with electricity and advanced biofuels as quickly as we can. Remarkable improvements in battery technology make it possible to use electricity to power new cars at a cost that is the equivalent of 50 cents a gallon. Sir Richard Branson and Boeing are working on advanced alternative fuels that can be made from algae or cellulosic ethanol, but these are years away from production in quantity.
Boeing should be working hard to support the new plug-in hybrid electric car technologies out of an interest for self-preservation as well as the environment. Rapidly reducing the demand for oil in cars and trucks may be the single best thing to help airlines that have no electric fuel option.
Two large airplane customers, Fred Smith, CEO of FedEx, and Herb Kelleher, co-founder of Southwest Airlines, are taking strong action through an organization called Securing America’s Future Energy. Last year they were at the forefront of the successful effort to beef up out-of-date corporate average fuel economy standards, and this year they intend to roll out proposed legislation that would move the U.S. away from oil toward electricity in surface transportation. Boeing needs to climb on board.
Second, public officials as well as Boeing need to do what they can to support efficiencies in airline operations, including voluntary mergers. A current example is the proposed merger between Delta and Northwest Airlines. Both are Boeing customers who, if they stayed solvent, would go on to make their planned purchases of Boeing’s 787 Dreamliner and other Boeing planes. But in the past, regulators have been reluctant to approve any airline merger for fear that it would reduce competition, only to find that neither one could survive alone.
A Delta-Northwest merger would result in a combined airline that has a better chance to stay competitive. Because these airlines have no hubs or routes in common, their merger would create a larger, stronger airline that could compete globally and continue to provide options for travelers.
Not long ago, the shock of the 9/11 attacks caused a drop in air travel and airline orders that resulted in significant Boeing layoffs. Boeing and the region pulled out and emerged stronger. The current oil shock is likely to be deeper and last much longer unless we take strong measures now to treat it as the crisis it is. Business as usual will not be sufficient.
STEVE MARSHALL is a senior fellow at the Cascadia Center for Regional Development and a nationally recognized expert on energy and transportation issues. BRUCE AGNEW is director of Cascadia Center. Cascadia, Microsoft and the Idaho National Laboratory are co-sponsoring a conference Sept. 4-5 at the Microsoft Redmond campus, “Beyond Oil: Transforming Transportation.”