Jet Fumes

Jet Fumes

Copyright 2008, Traffic World, Inc.

Shippers, truckers and others facing skyrocketing fuel costs this year may soothe the pain with at least one unassailable positive amid all the grim reports about energy prices - at least they are not in the airline industry.

The pain from fuel prices is taking on an entirely different character for the airlines, where the talk is less about coping and more about the long-term viability of the business as it is now built. In fact, as far as many airline executives are concerned, the short-term, volatile spikes in jet fuel prices pale next to the far larger question of what their industry looks like with its costs fundamentally altered.

That, in turn, is raising some painful questions and perhaps even more painful answers.

As one freight airline executive told us last month, there is a growing concern whether the very business model for much of the airline industry works with oil selling for $130 a barrel.

And Douglas Runte of RBS Capital told The Wall Street Journal last month, "Many airline business models cease to work at $135-a-barrel oil prices." The business models probably don''t improve at $143 a barrel, which oil hit last week.

These are not warnings about how air carriers will have to make new adjustments in operations to meet the higher costs. In fact, they are part of a growing chorus that suggests the very structure of airline business the world has grown used to over nearly three decades does not really work under the economics of triple-digit oil prices.

Of course, most of the attention on the impact of jet fuel prices has been on passenger airlines, where sensitivity to pricing is hitting demand and carriers are scrambling to pull down capacity. But the fuel pricing also is roiling air cargo operators, hiking costs and, more significantly, pushing shippers to question whether high-speed delivery by air is really worth the higher cost.

FedEx founder Frederick W. Smith says his company is seeing what certainly can be called a sea change in demand. Just back from a trip abroad, Smith said on the company''s earnings conference call last month he could see the change occurring. "There''s a tremendous movement of the lower value-added traffic off of the traditional freighter airplanes onto the water," he said.

Smith touted the adjustments FedEx has made domestically, and we believe he even hinted other acquisitions in the international arena could be coming.

But for most of the airline industry, saying the business model no longer works only raises a new question. What model, if any, does work?

There are growing whispers that the model needed to preserve air service, may have to look more like regulation.

Robert Crandall, the former chairman of American Airlines and a major architect of passenger airline business under deregulation, last month told an industry group, "Three decades of deregulation have demonstrated that airlines have special characteristics incompatible with a completely unregulated environment."

That''s hardly talk shippers or carriers should like to hear. But it seems as if the fumes from $143-a-barrel oil may make people say things they''ve said before.