Who will survive the oil crisis: LCCS, LFCs or legacy airlines?

[javmanjohno]

This is just a question out of curiosity really. I’ve heard of the recent BA FPP and their big orders for new B787s and A380s. To me this contradicts trends in the industry and with some airlines fearing bankruptcy and liquidation, what is BA’s reasoning behind this.
I have my own undeveloped theory but I’m not massively knowledgeable on the subject and was wondering what whether anyone has any better educated ideas on it.
My theory is that BA is expanding in anticipation of LCCs and LFAs being more susceptible to the oil crisis. I think they are looking to pick up the passengers that are willing and able to pay increased prices once some of the other airlines have gone under. With their goal of becoming ‘the world’s leading global premium airline’, BA would be the ones best able to justify high prices with the provision of a premium service. This is going on the idea that lower fares would not be commercially viable if the fuel expenditures push through 40% and continue to rise.
Just my theory though.
I look forward to reading your views.:ok:

[Donkey497]

Oil Crisis???

[javmanjohno]

The peak oil crisis: 2011 (http://www.energybulletin.net/stories/2010-12-29/peak-oil-crisis-2011-%E2%80%93-pivotal-year)

It’s just that I have read quite a few articles all pointing in the direction of fuel prices increasing indefinitely. Like I said though, it’s just my speculation.

[javmanjohno]

'Location: Oil Capital of Central Scotland' suggests you may know more on the subject than me?

[LD12986]

The BA A380/B787 orders are largely fleet replacenents, with modest capacity growth (and perhaps more if BA decides it can make money from fully depreciated 747s elsewhere).

I don't think the current oil price really comes into the actual fleet renewal decision. If the oil price becomes unsustainable, BA will cut capacity along with everyone else.

[WillDAQ]

BA has old aircraft, it needs to replace them, so it buys new ones.

I think there's too much of a tendency to assume oil price fluctuations will mark the end of life as we know it!

[jabird]

Excuse me for pointing out the obvious, but fleet renewal means lower fuel burn.

If fleet parked, it will be the older frames that are put aside.

'Peak oil' is the buzzword that gets kicked around, but it is quite simple maths really - the rate of oil usage is far greater than the glacial rate at which it is produced, so sooner or later it is going to run out.

I don't think it is just a question of LCC v Legacy. There are two other threats which will take passengers from both. The first is the development of technology - reducing (but certainly not getting rid of) the need for some business travel - especially the last minute, high yield stuff.

The second is that as the cost of oil goes up, the clamour for green taxes goes up, and the cost of renewable energy comes down, the case for high speed rail becomes more and more compelling. Even 'semi-fast' services have meant an end to numerous shuttle services between London and North England (with a significant help from APD of course).

Alternative fuels are being developed too, but they are some way behind renewable electricity generation, and aircraft can't just plug into a big charger on the stand - or at least not yet, batteries and fuel cells just too heavy!

So I'd say we're looking at a smaller pie within Western Europe (still plenty of growth in Asia, Brazil etc), but still room for both the low cost and the legacy model, both serve their purposes, it isn't just about BA being 'premium', it is also about being able to offer seemless transfers, etc.

[jabird]

Sorry, is LFA a low fares airline? As far as the punter is concerned, that's the same as an LCC - although of course there have been plenty of high cost base, low fare entrants in the market, but they don't tend to last very long.

I'd also take a punt that if oil rises to, say, $200 / barrel before suitable alternative fuels are developed, there could be a big collapse in the sunshine market, especially to Greece and the Canaries.

Domestic tourism (by rail) may become attractive again, and maybe Tim Smit will sell out the Eden Project to become an indoor holiday resort like Tropical Islands (http://www.tropical-islands.de/en/visitors.html) near Berlin. In the meantime, buy and hold shares in Butlins and Center Parcs!

[ZOOKER]

But even trains need oil to lubricate their moving parts.

[2Planks]

But not the MagLev ones!

[clareview]

The British Airways B767 and most of the B747 fleet are approaching or are over 20 years old (and the Gatwick B737's are also getting on a bit) The orders are to replace the B767 and B747 (remember BA has wanted to replace the B767's for several years and would have done so by now had a provisional deal to convert them to tanker use not fallen through).

Not only are the new planes a lot more fuel efficient, the using the A380 on very busy routes (e.g New York) instead of 2 other planes frees up a slot which can be put to good use.

[Aero Mad]

As Donkey497 points out, this thread is based on the assumption that there is an oil crisis.

The article quoted in fact dates from December 2010 - as I'm sure javmanjohno would agree, oil prices have the potential to fluctuate significantly and without prior notice. This year, they have. But not upwards. Oil prices have in fact gone down fairly progressively since April... so the airlines don't have to worry about an oil 'crisis' right now.

In a couple of months, the situation might be different. But that is the point I'm making.

[nigel osborne]

An interesting topic.Well an oil expert on BBC news said the other day that oil prices will stay around $100.00 a barrell for quite a few years, fluctuating up and down a bit with crisis.. like Libya..so no cheap oil on the horizon.

I too believe BHX future is better geared to fuller fare airlines..the West Midlands has a much bigger population than either the Luton or Stansted catchment area,with many more business and business men wanting to fly with a bit more than LCC have to offer.

Hence the increase and success this year of Lufthansa,SAS,and from winter Air France who will have all their flts on own A318 aircraft.;)

I do not believe that the LCC airlines will disappear, well the big ones anyway.Easy Jet and Ryan Air are just too big,and if they get in trouble can just trim the bad routes.

The small LCC are at a greater risk, as they don't turn over huge revenue and with much smaller route network and fleets are more susceptible to market changes.:bored:

You also need to consider renewable fuels.BA hope to half their fuel as bio fuel, but not until 2050.So any notion that Bio Fuel is going to totally replace kerosene within the next 40 years globally is a false hope.:eek:

BHX should be congratulated in pumping millions into ins infrastructure, new pier, widebodied stands new ATC longer runway, as the likes of LTN have not.

That will make BHX well placed in the future to take overcapacity overspill from the SE when it reaces its limits in 15 yrs or so.

So eventually it will not be all doom and gloom for BHX.:D

[nigel osborne]

Jabird agree with most of what you say ,except HS2.

1.An independent report a few weeks ago concluded the new HS2 trains will need 4 times more electricity ie equating 4 times more CO2, to run..not sure how that is more environmentally friendly?:=:ugh:

2.The other main argument for HS2 was that it will greatly reduce domestic flying and hence reduce CO2..

Well of course that theory is rubbish..CO2 doesn't stop its boundries over 1 country, and as we have already seen as airlines cut back on domestic routes out of London, carriers simply switch to using the planes on to longer routes so no CO2 savings at all !:uhoh:

I pointed these 2 facts out to our local MP who is all for HS2 and she had no answer to challenge these findings !:sad:

Also yes planes are getting more and more efficient, but as the World Wildlife Fund (WWF) said last year the massive growth in places like China and India for airliners is outstripping gains made per aircraft.

IE more planes being built burning more fuel albeit with better fuel economy against those retired.

[ZOOKER]

Doesn't matter what trains you have or how they are powered. If there is no oil to lubricate the doors no one will be able to get on. If they do , it will be standing-room only because all those nice shiny plastic interior fittings are made from........you guessed it!

[racedo]

Its not just about Oil.

The LCC's benefit from having a young flexible workforce that they can get rid of easily while the Legacys are full of older workers with health and pension requirements.

Hate to say it but easier to sack a 25 year old with 3 years service at a lower cost than a 45 year old with 23 years service................not many LCCs have an age profile of employees with 23 years service.

[jabird]

Nigel,

My argument about high speed trains was more an argument in principle, than a specific comment on particular routes.

Many of the world's busiest air routes are over distances of less than 500 miles, so they can be replaced by high speed rail.

My assumptions are based on the trends of rising oil price and falling renewable energy cost - so even if the high speed trains are consuming more than conventional rail, they are still emitting less CO2 than air.

I too have not been convinced by HS2, for the exact reasons you mention - it claims it will switch 6m pax from air to rail, but there are barely 600,000 people per year flying between the cities it serves. The cost per mile is also grossly excessive, compared to any European counterpart, even routes which are virtually all in tunnel.

Zooker - sorry, but making a point twice doesn't validate it! Oil used in manufacture is a one-off requirement, plus maintenance from time to time. Oil for lubrication is a fraction on the oil use as a power source.

[ZOOKER]

Electric trains+renewable energy. Mmm, isn't it? Marvellous.

No wind=no amps=no trains=no CO2.

"We are sorry for the delay to the arrival of the 10.30 express service from Edinburgh. This is due to the prevailing anti-cyclonic conditions".

[EI-BUD]

This is just a question out of curiosity really. I’ve heard of the recent BA FPP and their big orders for new B787s and A380s. To me this contradicts trends in the industry and with some airlines fearing bankruptcy and liquidation, what is BA’s reasoning behind this.


new m
javmanjohno;
I think the Iberia BA linkage should be mentioned here, WW has stated that the benefits of the enlarged airline are delivering significant synergies and profits, this gives BA a better buying power also.

And as has also been mentioned aircraft are aging esp LGW short haul fleet. same as AA putting in record breaking order,the ultimate prize will be a majorly reduced fuel burn per new machine.

BA want to lead in the consolidation of the European airlines, so new machines will be needed and affordable!

[jabird]

Zooker,

Electric trains+renewable energy. Mmm, isn't it? Marvellous.

No wind=no amps=no trains=no CO2.

"We are sorry for the delay to the arrival of the 10.30 express service from Edinburgh. This is due to the prevailing anti-cyclonic conditions".

Renewables work in combination - so low wind might be high solar. If you have an HEP dam and a lake on each side, you can pump the water back up when supply > demand (aka pumped storage).

They are still working on a more reliable battery or fuel cell, but this is about trends, not current output.

One thing is for sure - for the foreseeable future, there are many more ways to power a train than there are to fuel an aircraft.

[Torquelink]

Who will survive the oil crisis: LCCS, LFCs or legacy airlines?
Most, but not all LCCs, have relatively modern fuel efficient fleets whereas many legacy carriers still have many older gen short haul aircraft. Therefore, although the fuel fraction of total operating costs is greater for an LCC than a legacy carrier because their other costs are lower, the impact of fuel prices increases is less. In a high fuel price environment, LCCs will indeed have to raise fares but they will still enjoy a significant cost advantage over legacy carriers which will also have to increase their fares. Higher fares on legacy carriers will cause traffic spill onto the LCCs so, although they may lose some discretionary short-stay vacation / bucket and spade traffic, they will pick up higher yield less discretionary business traffic. Already, easyjet and Ryanair are modifying their business plans to address this new reality.

The most efficient lowest cost producers will survive - on short haul at any rate where brand and amenities matter less.

[Peter47]

Fuel costs are higher as a proportion of costs for long haul flights. Indeed fuel was a high as 50% for CX in 1999. (This amount was inflated somewhat by the accounting treatment of fuel hedges but its still very high.) I don't know what fuel costs are for easyJet or Ryanair but are certainly far lower proportion. High fuel costs would therefore be expected to affect long haul travel more as people switch to cheaper short haul flights. As legacy carriers are predominently LH & locos SH I would argue that the former will be affected more.

Where the rail journey is around three hours there is likely to be a large switch to rail (LHR - CDG/BRU traffic has halved since the tunnel was opened) This would affect routes such as LHR - EDI/GLA (which are already declining) but this is unlikely to extend to longer journeys.

I just checked the International Passenger Survey. The tunnel share of traffic to Switzerland (a typical loco destination) is around 5% but most of this will be road (the data doesn't split tunnel traffic by mode) so I would be surprised if rail was more than 1 - 2%, on a route served by high speed lines. Increases in fuel costs CO2 permits, APD etc will could certainly reduce air demand - people will switch to road (actually already quite high to Switzerland) if motoring costs rise less than those for flying, or simply travel less. The fastest growth has been in short breaks & long weekends which are more discretionary than the annual holiday. There is unlikely to be a large split to rail. Against this bear in mind that flying potentially avoids a days travelling, annual leave a nights hotel and except for VFR may be less than destination costs.

Where locos may be vulnerable is in the VFR market. The IFR shows a switch from air to road on the UK - Ireland routes over the last couple of years. Could this be due to APD (or Ryanair no longer getting large airport discounts)?

The air pax km assumed to transfer to HS2 in the next 40 years are about double the total existing level. Given that the rail share of London - Belfast & Scottish Highlands is not likely to be high that assumes a four fold increase over 40 years (3.5% compound) which I doubt as there are signs that the market is maturing. Also transfer traffic via LHR is likely to decrease if the airport does not get a third runway (which it almost certainly won't). The forecasts for transfer from road to HS2 are far more modest but that is because it seems to have been designed to primarily compete with domestic air routes which is a fraction of the domestic market.

Overall I think that legacy carriers would be harder hit.