Kokomo Tribune; Kokomo, Indiana

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April 16, 2014

Why high oil prices are actually good for airlines

(Continued)

"It's an equalizer," Kirby said.

Skybus Airlines launched in May 2007 promising to sell at least 10 seats on each of its flights for $10. By the following April, a spike in fuel prices proved fatal and the airline shut down operations overnight.

Without that competition, legacy carriers have avoided fare wars and kept ticket prices high.

"This represents the longest post-deregulation stretch that nobody has started a new airline in the United States," Baker says.

Virgin America was the last major new U.S. carrier. But since it started flying in August 2007, the San Francisco-based airline has lost hundreds of millions of dollars. It didn't post its first annual profit until last year and that was only after it stopped its rapid expansion.

Jeff Knittel, president of transportation and international finance at CIT, which leases planes to airlines, says the high fuel costs has created a financial discipline among carriers that has made them look closely at every expense — in the air and on the ground.

As part of their quest to reduce fuel consumption, airlines have replaced drink carts with new, lighter ones. Planes now taxi with only one engine running. And wingtips have been redesigned to reduce drag.

"It has forced efficiency throughout the entire organization," Knittel says.

High oil prices have also caused lenders to take a closer look at business models. In the past, they just considered the collateral — the airplane — that they were lending against.

"It makes the merits of the airlines matter more than they have in the past," says Hunter Keay, an airline analyst with Wolfe Research.

Airlines are only expanding to cities where they know they can make money, limiting competition and keeping everybody's flights profitable. Instead of fighting to become the largest airline in a city, airlines are now making rational decisions based on profitability.

"The only universal disciplinarian across the entire global airline industry is high oil prices," Keay says. "It makes even the bad actors make hard choices."

----

Scott Mayerowitz can be reached at http://twitter.com/GlobeTrotScott.

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