Nov 09, 2012
Airlines struggle with energy turbulenceBack
Airbus|South African Airways|The Boeing|Velvet Sky|Africa|Asia|Europe|Iran|Israel|Syria|United States|USD|Air Travel|Airline Carriers|Airline Industry|Average Airline|Crude Oil|Higher Oil Prices|Oil Price Super Spike|Oil Prices|Quasimonopolistic National Carrier|Transport|A380|Boeing 747-8|Middle East
© Reuse this
To understand the pressures facing airlines, we need only look back four years to the oil price super spike and the financial crisis of 2008, which, together, ushered in the first global recession since World War II. In 2008, at least 30 airlines crashed financially as spiralling fuel costs and weakening demand wiped out profits.
This year, it has been a case of déjà vu. A double-dip recession in the European Union, an anaemic so-called ‘recovery’ in the US and slowing growth in Asia have slackened demand for air travel. Meanwhile, Brent crude oil has been selling for over $100/bl since early 2011, except for just one brief dip below that psychological benchmark in June.
At these prices, fuel costs comprise 30% to 40% of average airline operating costs. Predictably, the International Air Transport Association (Iata) has warned that the global airline industry’s profits will shrink from $7-billion in 2011 to $3-billion this year, while Africa and Europe could post losses.
Short-haul flights suffer relatively more from higher oil prices, since average fuel efficiency – that is, fuel consumption per passenger kilometre – is substantially lower than for long-haul flights.
So, it is no wonder that South African airlines are taking strain. Low-cost carrier Velvet Sky went bankrupt earlier this year and 1time Airline recently filed for business rescue. Trying to compete with a State-subsidised, quasimonopolistic national carrier did not make their struggle for survival easier.
But South African Airways (SAA) and its offshoots are also taking financial strain – SAA posted a loss of R1.3-billion in the year to March. The adverse market conditions have contributed to the management problems at the national carriers – half SAA’s board of directors and the CEO recently resigned. SAA has received another controversial government lifeline in the form of a R5-billion loan guarantee – on top of the R15-billion received over the past decade – provided that the new management come up with a realistic business plan to return the airline to profitability.
But the economic outlook does not inspire confidence in the new management’s ability to do so. For one thing, if the worsening tensions in the Middle East – such as Syria’s descent into civil war and Israel’s threats to bomb Iran – boil over into a new regional conflagration, there is no telling how high the price of crude could spike.
Secondly, the eurozone debt crisis and the US’s equally large debt burden are anything but resolved, because unlimited ‘quantitative easing’ (read money printing) by the European Central Bank and the US Federal Reserve cannot by itself create the real economic growth that is necessary to avoid a debt implosion without superinflation. That requires structural reforms and – crucially – affordable energy supplies.
Iata recognises an oil price spike and the eurozone debt crisis as the two biggest risks facing the industry, and yet airline manufacturers seem to be blissfully unaware of these pressures. Last month, European manufacturer Airbus said it was anticipating orders for 28 000 new planes over the next 20 years and expected the total world passenger fleet to double in size. US rival Boeing is even more optimistic about future aircraft sales. But sales of superjumbo jets like the Boeing 747-8 and Airbus’s gargantuan A380 doubledecker plane, which offer more passenger seats per unit of jet fuel, are already flagging. And airlines are having difficulty filling seats in those they have already bought.
When it comes to peak oil, the managers of Airbus and Boeing – along with those of most airline carriers – have their heads in the clouds. World oil production is likely to slide off its seven-year plateau some time this decade, ushering in a new era of annually falling supply and rising prices. The air transport sector, which currently accounts for less than 10% of oil consumption, has to compete with other demand sectors like road transport, shipping and the petrochemicals industry.
Currently, the only substitutes for oil-based jet fuel are synthetic coal-to-liquids fuel made by Sasol and small amounts of biodiesel blended with conventional jet fuel. Significantly expanded production of these substitutes may be constrained by concerns about carbon emissions and the food/fuel trade-off respectively. Thus, the long-term future of aviation is highly uncertain.
Several decades hence, it is hard to imagine air travel on anything like today’s scale unless there is a radical breakthrough in energy technology. Perhaps, if the dreams of low-energy nuclear reaction pundits someday become real, then even the sky will not be a limit to human mobility. In the meantime, airlines are in for a bumpy ride.
Edited by: Martin Zhuwakinyu© Reuse this Comment Guidelines
Other Dr Jeremy Wakeford News
Updated 42 minutes ago General Motors Co CEO Dan Akerson will step down next month and be replaced by GM "lifer" and global product chief Mary Barra, a sign that the development of new vehicles will be the paramount focus of the company that emerged from bankruptcy four years ago. The...
Updated 1 hour 58 minutes ago Nigeria's state-energy company NNPC hasn't accounted for nearly $50-billion in revenue from the sale of crude oil which should have been paid into government accounts under law, the central bank (CBN) has said. CBN Governor Lamido Sanusi said in a letter dated...
Updated 3 hours ago Energy-focused engineering group Kentz is gearing up for what it expects to be material growth in Mozambique in the coming years, owing principally to the discovery of large-scale gas resources and the ongoing development of the country’s coal and power...
Recent Research Reports
Defence 2013: A review of South Africa's defence industry (PDF Report)
Creamer Media’s 2013 Defence Report examines South Africa’s defence industry, with particular focus on the key players in the sector, the innovations that have come out of the defence sector, local and export demand, South Africa’s controversial...
Road and Rail 2013: A review of South Africa's road and rail infrastructure (PDF Report)
Creamer Media’s Road and Rail 2013 Report examines South Africa’s road and rail transport system, with particular focus on the size and state of the country’s road and rail network, the funding and maintenance of these respective networks, and the push to move...
Liquid Fuels 2013 (PDF Report)
Creamer Media’s 2013 Liquid Fuels report examines South Africa’s liquid fuels market, focusing on the business environment, oil and gas exploration, the country’s feedstock supplies, the development of South Africa’s biofuels industry, fuel pricing,...
Projects in Progress - Second Edition (PDF Report)
Creamer Media’s second Projects in Progress supplement considers some of the major project developments under way, including high-profile energy and transport projects, as well as a few of the lower-profile public and private developments. What remains apparent is...
Water 2013: A review of South Africa’s water sector (PDF Report)
Creamer Media’s Water 2013 report considers the aforementioned issues, not only in the South African context, but also in the African and global context, and examines the issues of water and sanitation, water quality and the demand for water, among others.
Canadian Mining Roundup for June 2013 (PDF Report)
The June 2013 roundup includes details of the development of TSX-V-listed Aldridge Minerals’ flagship Yenipazar polymetallic project, in Turkey; the Canadian Nuclear Safety Commission’s renewal of Cameco’s uranium mining licence pertaining to the Cigar Lake...
This Week's Magazine
Mitsubishi Motors South Africa (MMSA) has introduced a 4x2 derivative of its Pajero Sport sports-utility vehicle (SUV), which will give it access to a substantial slice of the full-size SUV market, where it will compete with the likes of the Ford Everest, Chevrolet...
South African Energy Minister Ben Martins has affirmed that the government wants the country to be globally competitive in the nuclear sector. "Our responsibility has always been ... to ensure that, in nuclear energy, South Africa can compete with the rest of the...
Mercedes-Benz South Africa (MBSA) president and CEO Dr Martin Zimmermann describes the new S-Class as “a special place to be”, with the car creating a sense of “wellness” once you are seated inside the German brand’s flagship model. It is difficult to argue...
Water scarcity and water-quality issues are broadly recognised and understood in most political, business and civil organisations in South Africa, but solving water issues will require wide and continuous action in catchments and municipalities by organisations and...
Work is well under way on the R212-million Imvutshane dam, 30 km north-west of Stanger, in KwaZulu-Natal, which is a key link in supplying people in rural Maphumulo with a reliable source of safe drinking water.
Next ArticleCoega refinery a costly cul-de-sac