Speculators Did Not Create Air Woes

Speculators Did Not Create Air Woes

Copyright 2008, Traffic World, Inc.

The airline business model is broken and the people who run the industry don''t know how to fix it or how to replace it with a different model. In financial desperation, the nation''s airlines have formed a coalition seeking to stop what it calls oil speculation. Customers are asked to support them by writing to public officials.

Having recently been subjected to airline abuse, I shall not help the airlines out. I''m not persuaded that the current high price of oil and of jet fuel is the result of speculation, or that it wouldn''t be just as high if there were no speculation.

Southwest Airlines is financially the most successful airline in the industry today because it has a hedging program that ensures its fuel supply until at least 2010 at prices last seen in 2007. I''ve seen no discussion of the difference between evil speculation and wise hedging, perhaps because there is none.

Every time Southwest hedges it speculates on the future price of jet fuel. If it did not, it wouldn''t use its capital to lock in contracts today for delivery of fuel tomorrow at predetermined prices.

Equally reputable sources claim the price of crude oil - and the products refined from it - is the result of supply-demand, not of speculation. As nations like China and India develop and grow their economies, they use more energy, contributing to rising demand for oil. Others claim it can be laid at the feet of speculators, but offer no evidence to support the claim.

Besides, what if speculators are at work? They don''t intend to take delivery of the oil they have purchased and will liquidate their futures contracts before they have to take delivery. To some in the financial world, speculation provides liquidity and stability to an otherwise illiquid and unstable market. Speculators - and Southwest - bet that the price will go up. If they believed it would fall, they would sell puts, futures contracts giving them the right to sell at the current high price. If they are right, they profit also on the downside.

The airline campaign claims to be on behalf of all Americans. Pardon my skepticism. This is an industry that nickels and dimes customers with fees for checking baggage, seeking window or aisle seats, and just about anything else it can think of to generate more revenue - charging for carry-ons may be next.

Airlines desperately need more revenue, and many customers are prepared to pay more, but would prefer to see it in the price of the ticket and not the nitpicking fees they face. Airlines respond that they cannot raise fares because competitors won''t follow and they''ll lose traffic if they do. As aircraft on average are more than 75 percent full, there aren''t that many customers to be lost before the competitor is sold out and the fare-raising carrier effectively has a monopoly as the only one with capacity available.

The state of the airline industry is reminiscent of the railroads before they were deregulated nearly 28 years ago. Many employees were uncaring and unpleasant to customers. They constantly were pressured by their own managements to do more with fewer resources and there were no sanctions to discourage them from taking their anger out on customers.

Just like the railroads a quarter century ago, the airlines are trying to cut their way to prosperity, ignoring the evidence that no industry ever successfully has done so.

There is a certain arrogance on the part of the people who run the airlines (not unlike the attitude of railroad executives before deregulation). If they want customers to support them, it might help if they treated customers as though they really valued them rather than as necessary nuisances. I once heard a railroad executive say he could run a fine railroad if it weren''t for all the shippers that get in the way. Fortunately for the railroads and shippers, he and the people who thought like him have retired.

Airlines have managed to squander what goodwill they had and growing numbers of customers will offer them no support at all in this time of distress. As I recently wrote to an airline chief executive, "your operations people hit the perfecta last week. Of four segments on one trip, none was on time and one didn''t even fly." The cancelled flight came after five hours and five announced gate changes. Had the airline canceled the flight more promptly, I at least could have had a decent meal in town rather than be forced to subsist on the dreadful fare available at the airport.

Airlines are not entitled to exist. They have to work at it in a competitive market. Several airlines have ceased operations already and some may go bankrupt. If so, and if they cannot reorganize under Chapter 11 and go out of business, someone else will come along and fly airplanes from one city to another. The service may even be better.



(Editor''s note: A journalist and former rail executive, Mr. Kaufman is a consultant whose clients include Norfolk Southern and the Association of American Railroads.)