Here is the airline’s business model and problem in a nutshell: use cheap fuel to propel people between healthy economies. Economies have flatlined, and fuel is becoming too expensive to burn. The global aviation business model is dead.
As the oil price rises, the incumbents will die in roughly the order of their structural costs. It will start with British Airways, and end with RyanAir.
To see why, take a look at this:
It shows actual British Airways fuel and oil costs as a function of average oil price for the last 4 years, with estimates for $85/bbl and $140/bbl. There is a pretty good fit at £30 million per $1/bbl.
Any enterprise must receive at least as much revenue as it spends. This applies equally to a company, a kibbutz or a country. When it doesn’t, debt accumulates until no-one can or will lend any more, and it fails.
There are only two ways to do this: raise revenue above costs, or reduce costs below revenue. The former is constrained by opportunities for earning revenue. The latter is constrained by those for reducing costs.
Airlines get hammered at both ends. Deglobalisation and economic stagnation reduce the number of people needing to fly, and their means to do so. Rising fuel prices inflate their costs.
You can see both in British Airways 2008/2009 business report[1]. Last year, they increased revenue on £8.7 billion by £234 million (2%). In the same period, their fuel costs increased £914 million from £2 billion. They consumed about £900 million of their reserves in 2009, to make a loss of £400 million on its operations and leaving itself about £400 million in reserves.
They break even roughly at $70/bbl. The oil price today is $85. If that was the average for the year, they will lose £450 million in 2010 (they are on track for £600 million loss). At $140/bbl (a reasonable estimate for 3-5 years out, $100/bbl in 2008), they will be losing £2.1 billion a year.
Working the other way round, a cost saving of £100 million is destroyed by a $3.5/bbl increase in oil price. That is roughly the size of the recent “offer” put to BA’s management by its union. The oil price has risen about $3.5/bbl since the start of the dispute.
It is fighting for its survival, their only discretionary costs of comparable size to their fuel exposure are the £2 billion employee costs, yet they are currently in a moronic industrial dispute with its suicidal cabin crew. That is why they will merge with Iberia—facing its own version of this—before the combined entity collapses.
All airline businesses face their version of this problem—environmental factors overwhelm any self help measures. Eventually, aviation will degrade into a military application, and the pursuit of whatever will correspond to the ultra rich—a purveyor of Veblen goods only.
References
[1] British Airways, Report and Accounts for the year ending 31 March 2009 PDF