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Carr: Will oil really kill the cheap seats?

At $145 a barrel, oil has become the black ink that is rewriting the rules of air transport. Interestingly, there are disparate views on where these rules will lead us. Michael O’Leary, the take-no-prisoners chief executive of Dublin-based budget airline Ryanair, said in June that bargain carriers like his and U.K. rival easyjet are here to stay.


September 15, 2008
By David Carr

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At $145 a barrel, oil has become the black ink that is rewriting the rules of air transport. Interestingly, there are disparate views on where these rules will lead us. Michael O’Leary, the take-no-prisoners chief executive of Dublin-based budget airline Ryanair, said in June that bargain carriers like his and U.K. rival easyjet are here to stay.

Air Canada’s Robert Milton holds an opposite view, predicting that record high fuel prices could spell the end of discount airlines. A moot point in Canada given that WestJet jettisoned its discounter roots years ago and nobody has jumped in to take over where Jetsgo left off. Not surprisingly, both O’Leary and Milton were defending their respective business models against that of the other. No model is immune to the soaring price of fuel, and some airlines are going to take a harder hit than others. Major U.S. airlines, for example, have been slow to renew their fleets and retire older, thirstier airplanes. That’s going to hurt.

Predictions, like business planning, are a tough business especially when the price of the commodity driving the business increases 35 per cent over 90 days, as oil has recently. Just ask General Motors. In June, when the price of oil was $130 a barrel, O’Leary announced a 20-per-cent increase in year-over-year profitability, while cautioning that the best his airline could expect is to break even this financial year, and only if the price of oil held firm. So what is it to be at $145 a barrel – higher fares, fewer flights, fewer passengers, or a combination of all three?

At the same time Milton was speculating on the end of cheap airfares, Air Canada was matching WestJet’s latest seat sale with $19 base fares between Toronto, Montreal and Ottawa, although in an era of fixed fuel charges, cheap does become a relative term. To be fair, Milton was referring to the single-cabin, no-frill business model. He might have a point. JetBlue Airways is considering a premium cabin to boost revenue, and word out of Calgary is that everything is on the table at WestJet, including charging a premium for the extra legroom in emergency exit rows – something this space advocated many columns ago.

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But while Air Canada joins other ‘full-service’ airlines in cutting staff, parking aircraft and shedding routes, single-cabin WestJet appears to be in an expansionist mood, taking on new routes, increasing the frequency of others and adding up to 46 airplanes by 2013. Perhaps the new rules are that there are no rules, just individual circumstances.

What is certain is that the current oil crisis may result in an industry shakeup so severe that even Chapter 11 may not be enough to help the mangiest American dogs survive for much longer. Airlines are going to disappear, but a single versus multi-tier cabin is not going to be the arbiter of who stays or goes.

Both Air Canada and WestJet will ride out this storm, as will other well-managed carriers such as Air Transat, Southwest and O’Leary’s Ryanair, although some airlines will have to rethink charging extra for anything that is not nailed down, and roll some of the added costs of doing business into the price of a ticket. Fuel surcharges are a case in point.
Given such a heightened level of uncertainty, is now the time to burden a beleagured industry with a new layer of green taxes? This means either Europe’s proposed cap-and-trade system or Canadian Liberal Leader Stéphane Dion’s uneven carbon tax shift that would be applied to aviation fuel but leave the local Esso gas pump untouched.
Emissions from fossil fuels are a global problem and aviation is an easy target. But it is not NIMBYism to suggest that air transport has already carried incredible costs since 9/11, especially in Canada where the government profits excessively from the same airports it once bankrupted. In fact, why not consider that annual $1-billion windfall as aviation’s carbon offset by pouring it into environmental R&D?

In June, Ottawa International Airport cut charges five per cent, saving grateful customer airlines an estimated $600,000. The Greater Toronto Airports Authority has slashed charges to freight carriers 25 per cent (freight being less discriminatory than passengers over where it lands). As Ottawa’s chief executive said at the time, “this is not just an airline crisis, but one that impacts the entire industry and ultimately our communities.” Precisely.  

David Carr can be reached at:
davidjcarr@sympatico.ca