The Corporate Law Group

Airlines and Oil

With oil prices around $100 a barrel it’s not a good time to be a mass consumer of fuel. A recent chart we saw illustrated that 20% of airline revenue is spent on fuel; another 20% for labor costs, and airlines only enjoy about 6.5% in profit. A FOTB (Friend of the Buzz) told us that someone (the Oracle of Omaha?) had analyzed airlines and found that collectively there had been no return on capital from that industry since its inception. The chart also included showed 15% in federal taxes and fees (is there anything these guys won’t take a piece of?), and about 10% for costs of planes (Is that all?; that’s kind of scary; upgrade your planes guys). The remaining 28.5% was for a slew of miscellaneous things. One thing is for sure, as fuel prices rise, so will tickets. We’re sure most airlines engage in all kinds of fuel arbitraging but eventually there will be nowhere to hide as prices go up over a long term. A chart we saw has United winning the fuel cost control war with average price per gallon of $1.75 in 2009, reduced from $3.54 in 2008. Well, even those days are over with the recent oil price hikes in 2011. But as what goes up, then comes down, airlines should benefit. Oil prices are declining right now in the wake of settling of Middle East unrest and airlines are benefitting. American’s loss is expected to be lower than previously estimated and others might actually make a profit. Whoa!

Paul Marotta

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