Having recently returned from an international business trip, it didn’t take me long to realize that even nuts and pretzel bags are limited now. Not long ago a “full” meal was offered on most international flights free of charge. Not that I crave airplane food -- but it is clear evidence that most airlines are struggling as much as other industries these days. The problem is not the food or the extra charge on bags and carry-ons or the $6 M&M candy bag; it’s the price-to-service ratio.

I remember when “the adventure of flying” was an exciting part of the trip. The experience of purchasing the ticket, packing and the actual flight were things I looked forward to enthusiastically. Today that experience has changed dramatically; purchasing a ticket is now a negotiation struggle that involves tracking prices every day for a week across several different airlines in order to find the optimal seat for a reasonable price and maybe grabbing some extra leg room for an extra $35.

Packing is now an intellectual challenge that requires stuffing as many clothes as possible in the minimum space, as every extra sweater may mean an extra dollar on weight surcharge. Arriving at the airport involves the psychological thrill of having to strip halfway in public to demonstrate you are not a major threat. And finally, after all this is done and you feel ready to exhale and relax a bit, you may have a few minutes to buy a snack and a magazine before you are chained for three hours to a seat designed for a human three-quarters your size, which gives you enough time to pray and offer that sacrifice to the sky lords to ensure you make your connection in time.

The truth is that passengers only suffer a portion of what the commercial aviation industry is experiencing. Every day more sophisticated technology and complex search engines increase the already fierce competition between airlines. Airline pilots and crew members have had their salaries cut and pensions terminated and the costs and risks of flying a plane and running an airline are rising exponentially, particularly in terms of fuel and insurance.

It is noticeable how airlines have tried to cut their costs and expenses during recent years without increasing prices on tickets that are already unreasonably expensive -- not because they are deeply concerned about our wallets, but because they need to stay alive in the market. Naturally, “perks” like food or space were the first on the cutting list; but hey, we are used to that now and, it’s not like we could do something about it. I instead, the real concern of today is the price for jet fuel (oil), and how that will impact the fare cost.

Oil is a volatile commodity that dictates a huge part of the costs and prices of many industries, especially the airline industry, which had to develop protective financial instruments to secure the prices they pay for fuel. Airlines and financial institutions have created options to hedge fuel costs to prevent paying for fuel once it reaches a determined price. This “protection” works in favor of the airlines when prices of fuel are rising. The offset cost of buying the option works in the same way as a regular insurance premium and compensates for the potential cost and risk of prices going up. The problem comes when this protection works against the airlines and the intended purpose. Thus, if an airline hedges on a set price of oil and commits to pay this price regardless of the price fluctuation, it incurs the risk of the fuel prices falling below this mark and will still be locked in to pay a higher price for fuel, as well as the extra cost of setting the financial instrument. This has already happened to some airlines in recent quarters.

Despite the many hedging models developed by financial institution and airlines, the reality is that the risk of incurring i higher operative costs cannot be eradicated -- airlines fares are subject to changes on a complicated mix of commodity prices, seat demand, competition, seasonality-- and on top of that -- political stability. Most likely, we – the consumers – will soon see these risks reflected in the price of a seat. Eventually costs may pass onto us as the airline paradigm has shifted. Today the major focus for airlines is not “generating savings” …it’s simply staying alive and remaining competitive while preventing airfare costs from forcing them out of business.

Sadly, much has changed since the days when all an airline had to do to save $40,000 was to cut one olive from every salad served in first class. Airlines won’t go anyway, but the pleasant experience has faded, unless of course, that you (or better yet, your employer) can afford to cover the cost of leather seats up in first class.
Share To:

Diego De la Garza

Post A Comment:

0 comments so far,add yours