Several years ago, when I began to realize the implications of peak oil, I wondered: Will I ever get to see Asia? Or Africa?

I had no doubt that the air travel business was in for a world of hurt, once oil prices started going up fast. And when that happened, air travel to such far-flung destinations would be out of reach for regular folks like me.

I just didn't think that day would come quite so soon. I can already see my window of opportunity to lay on the beaches of Thailand, or hike the rugged mountains of Tibet or Japan, closing.

In the last 90 days, jet fuel prices have spiked 38%, rising along with crude.

It was no surprise to me, then, to see some of the smaller carriers starting to go belly up this year. As oil has hit record high after record high, fuel costs have actually exceeded labor costs for many airlines, accounting for as much as 40% of operating expenses.

They just couldn't price their tickets high enough to keep the business aloft. Of the 769 million travelers who boarded U.S. flights last year, we might think a sizeable percentage are on discretionary trips.

(Likewise, fuel prices are hurting the trucking industry and causing truckers to strike. For some, diesel costs have spiked about 90% in the last six months alone, far outpacing the cost increase of gasoline. Who wants to operate at a loss?)

The budget carriers, already surviving on razor-thin margins, have seen their profits simply evaporate.

So far, eight airlines have officially bitten the dust:

Aloha Airlines

ATA Airlines

Champion Air

EOS Airlines

MAXjet Airways

Oasis Hong Kong Airlines

Skybus Airlines

Skyway Airlines

One of them-ATA Airlines-even left some soldiers from Vermont stranded in Iraq, unable to get home as the company went bankrupt.

Frontier Airlines is now bankrupt, too...and they won't be the last to go, either.

The bigger carriers with deeper pockets (and more unsold seats) have kept prices relatively low while burning through cash reserves as their own fuel costs mounted. American Airlines is now losing about $3.3 million a day, and at the current rate, could burn through its $5 billion in cash reserves in as little as four years. And it has the biggest cash reserve in the industry.

When you're bleeding like that, skimping on maintenance, taking safety risks like flying with inadequate fuel reserves, and nickel-and-diming your passengers will only buy you a little time.

Consequently, the bigger carriers are looking to mergers in an attempt to save their skins.

Northwest Airlines and Delta Air Lines have proposed a merger, which is now under review. The Northwest CEO recently said that the merged entity will likely be smaller than the sum of the parts, due to soaring fuel costs.

If the merger receives the approval the Justice Department and Congress, it's likely to spark a wave of additional mergers. UAL, the parent company of United Airlines, is already in talks with both Continental Airlines and US Airways, and I anticipate more to come.

Other carriers are turning to debt, to ride out what they hope is a limited era of unprecedented fuel costs.

The last of Britain's business-class only airlines, Silverjet, just borrowed $25 million from an unknown Middle Eastern investor (reputed to be an Abu Dhabi investment fund) to get it through the rest of the year...with a promise that it could borrow another $75 million in the future.

Tricky Trading

The U.S. airline sector as a whole posted an $11 billion loss in the first quarter of this year. "When all the results are in, this will be one of the worst quarters for the industry in its history," said John Heimlich, chief economist for the Air Transport Association.

Every major carrier except Southwest Airlines recorded a loss. Southwest posted a $34 million profit.

How did Southwest do it? By hedging 70% of their fuel costs. The next most hedged was Northwest, at 45%, and all the rest were under 24%. Their hedging strategy is simple: They buy fuel futures when the market is soft. Southwest is now benefitting from having the foresight to start hedging a full decade ago.

To capitalize on my own foresight, I have wanted to short the airlines so badly for several years running. But I never did, for three reasons.

One, there is always the possibility of yet another airline industry bailout by the feds, which is a deadly risk if you're short.

Two, it's a business with a long growth pattern. Airbus and Boeing are still sitting on a long book of backorders and projecting that they will double the fleet size over the next several decades. Historically, shorting the airlines has been a good way to get your head handed to you.

And three, I couldn't find any good ways to play the short side of the air industry in general. There are no airline ETFs, and for good reason. It's mostly a money losing business, with extremely slow growth rates and enormous risk and capital requirements.

There is, however, a way to profit from the airline industry collapse, which we'll get to in a moment.

One additional factor is weighing against the airline industry, and that's climate change. Air travel is estimated to account for somewhere between 4-9% of all emissions, and people are beginning to think twice about hopping a flight when perhaps a teleconference would do. Increasing public sensitivity to the climate change issue will add pressure to the industry's burden.

A Slow Boat To China

The equation is clear: skyrocketing oil prices, thanks to peak oil, are the death knell of cheap air travel. From here on out, as oil continues to rise, those cramped seats will get harder to find, and more expensive.

In time, air travel will once again be only for the rich. I expect it will end much as it began, with limited high quality service for a select clientele. Consider this: A seat on the first commercial air flight, a 23 minute hop from St. Petersburg to Tampa, Florida in 1914, cost more than $3600 in today's money.

For us regular folks, this could be our last chance to see the world on the cheap, without devoting weeks or months to the traveling part.

According to Delta CEO Richard Anderson, ticket prices would have to rise 15-20% just to cover increased fuel costs. "You can't underestimate the spike in fuel prices and how it is fundamentally changing the industry," he said.

But like most many aspects of peak oil, there may be a silver lining here. Life will slow down from its current frenetic pace, and that's not such a bad thing. Maybe I'd enjoy a long journey by boat to Asia. Like the song from 1945 says:

I'd like to get you
On a slow boat to China,
All to myself alone.
To get you and keep you in my arms evermore,
Leave all your lovers
Weeping on the faraway shore.

Out on the briny
With the moon big and shinny,
Melting your heart of stone.
Darling, I'd love to get you
On a slow boat to China,
All to myself alone.

Some things take time. It's not easy to melt a lady's heart on a mere five-hour flight.

So in some ways, I'm not going to miss cheap air travel that much. Yes it's convenient when you have to cross the country, but the whole experience has become so painful. Between the lost luggage, the cancelled flights, the discomfort, and being treated like a presumed criminal, I look at economy air travel as a last resort.

I actually opted to drive 15 hours home for Christmas for the last two years, rather than endure the 12-36 hour random experience of trying to fly at that time of year, with bad weather and cancelled flights and a crush of travelers. On a cost basis, I figure I at least broke even. But I enjoyed the trip far more, feeling like Jack Kerouac with the windows down and the stereo blasting big band music as I blew across hours of open desert on the old Route 66.

I know that some day, when fuel becomes too expensive and hard to get, I'm going to miss that experience.

But by that time, I hope to have an even better alternative: a rail ticket.

Rail: The Longest Safe Bet You Can Make

If you've ever had the pleasure of riding a modern high-speed railroad in Europe, you know why I say that.

Taking the TGV, the electric-powered French long-distance railroad, across the country from Paris to Provence was without a doubt the most enjoyable travel I have ever experienced. I boarded the train shortly before departure time without any security checks, and kept all my bags with me the entire way. I luxuriated in a huge leather reclining seat while being quietly whisked at 200 mph across the picturesque countryside. Regular service walked up and down the aisles, asking if I'd like anything to eat or drink. Or I could get up and stretch my legs and walk down to the café car if I wanted something-like a decent sandwich on a nice baguette, not some nasty air "snack." Door to door, it was a little cheaper than an air ticket, and took less time because trains go from city center to city center, not to some godforsaken outpost 20 miles outside of town.

Compared to the cattle car experience of discount air travel, it's bliss.

Comfort aside though, rail is bound to gain market share in the coming decades as the airline industry contracts. This is because rail is by far the cheapest and most fuel-efficient form of transport, requiring about a third less fuel than air for personal travel, and as little as 3% of the energy for freight.

Rail can also run on renewably generated electricity, making it a true transportation alternative for the future.

Now, I realize that the only long-distance passenger carrier in the country, Amtrak, is terminally broken and underfunded and suffering from decades of neglect. But as the rail resurgence in freight travel picks up speed, I have no doubt that passenger rail will follow.

Simon Fraser University professor Anthony Perl, author of the new book Transport Revolutions, predicts that in 2025, no more than 25 airports will be functional. Electric powered transportation and rail will be the standard transport options.

Very simply, in a post-peak oil world, rail is a no-brainer. It's probably the longest safe bet one could possibly make.

That would explain why the sector has attracted large investments from some of the wealthiest investors in the country over the last several years.

Bill Gates has become the largest investor in Canadian National Railway (NYSE: CNI). Warren Buffett and George Soros have taken large positions in both Union Pacific (NYSE: UNP) and Norfolk Southern (NYSE: NSC). And Carl Icahn has taken a $122 million stake in CSX Corporation (NYSE: CSX).

Their investments have already paid off handsomely. Consider this chart of a few of the top airlines against their rail counterparts over the last year and a half:

What else need we say?

Until next time,

 

Chris

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I don't know where most people in the U.S. have traveled by rail extensively, but I used to travel by rail a lot when i was a little one. I loved the meals in the meal car, and it really wasn't that expensive. The seats were very comfortable. I also loved stopping in the big railroad stations like the one in Kansas City. It was a place to do things and meet people. Does this sound as bad as air travel?

I'm not trying to burst your bubble, but, we've got a serious problem, and i'm afraid it has nothing to do with peak oil. Instead of reporting on these issues you should be reporting to the public on the issue of the Illuminati. This highly secret cult are THE REAL RULERS OF THE WORLD. Look into it. Someone just tried to attack my computer, have to go.

Good article. I note that the several international cruise - tour - companies whose email and catalogs I get now are offering 2 for 1 prices for cruises in Europe and China for later this year. Obviously they are having trouble filling cabins.

Jack

Globalisation is over. Take away cheap and easy to get oil and the whole edifice falls apart.

Planes don't fly without Jet-A fuel. The price of which has climbed staggeringly. Air NZ here in New Zealand has put up it's prices 3 times in the last 6 weeks.

Fares are still quite cheap - but that is based on the idea of fuel remaining cheap as well. It's a paradigmal shift that very very few understand. Peak Oil is going to change everything that we do.

Last week - the NZ Government brought back the Railway system - that had seriously gone to seed under a range of private investors. The Govt here is serious about using Rail as a major part of it's transport policy.

The current Prime Minister in 2005 talked about Peak Oil - but have not heard much from them on it since. Buying back the train system brought back the talk of Peak Oil.

If they can develop something like the train system in Europe - that would be great.

Most pundit's here have moaned about the train investment - all of them come across as being unaware of Peak Oil. If they knew about PO my guess is that they wouldn't be complaining so much.

Cheers

Blair Rogers
http://peakoil.bigg-wither.com

I agree with your assessment. The US is poised to change the mode of transportation. I am an engineer for the UPRR and flew for years. I have first hand experience at both.

All of this may be true to a certain extent, let's not forget about technology. And as much as a cliche as it may sound, technology will save the day for the air industry.

If we are thinking about electric cars, why not planes?

Some aircraft engine manufacturers are already working on fuel cells. Having hydrogen stations at airports seems much more feasible than converting hundreds of thousands of gas stations around the world.

All of this may be true to a certain extent, let's not forget about technology. And as much as a cliche as it may sound, technology will save the day for the air industry.

If we are thinking about electric cars, why not planes?

Some aircraft engine manufacturers are already working on fuel cells. Having hydrogen stations at airports seems much more feasible than converting hundreds of thousands of gas stations around the world.

For what it's worth, consider these two recent "back of the flight plan" calculations I did while flying a Boeing 757 across our country...
At 100% occupancy (not a rarity on some days/flights) it would have taken a single person driving a car getting 75mpg to equal the per person fuel efficiency of an aircraft not necessarily known for that metric.
At 80% occupancy, a $1 increase in jet fuel meant an increase in fuel cost per passenger of $39 from Boston to LAX.
Interpret what you want out of these, but remember if the driving public says they won't change their habits at $4 gallon while getting 18mpg, what will ahppen when that same $4 gallon jet fuel comes to an airline seat near you getting the equivalent of 75mpg?

Chris, maybe you will one day travel further, faster and cheaper than possible today.

Maglev trains in near vacuum tunnels could travel many time faster than any passenger plane, all with current technology and using very little electrical energy.

It's quite possible that in the future we could head to Thailand for a cheap weekend on the beach.

David.

Would you please comment on ship travel? I live in Panama and like to go to the US twice per year.
Are there any ships that take passengers?

Thanks,
Betty Gray

Chris,

Always enjoy your insight; don't always agree, but do look forward to your comments.
In this current article, I agree with your analysis. I picked rail stocks some time ago believing that coal transport was going to keep bread & butter on the railroad's table, even as diesel and trucking costs began to rise. Passenger rail remains a flaw of the American character. Don't know if we can every break the automobile mentality when it comes to passenger service. But durable goods? That's a different story. I hope that you can return to this subject some months down the road to see if your projections are panning out. But I plan to hold onto my rail stocks until cap & trade becomes a reality.
Again, thanks for your insight; always a joy to read your column.
Sincerely,
Robb

My opinion for years is that the best method of travel was by train. It was inexpensive, and only stopped in major towns. Travel by train of days past was not the same as now. It was dirty, un-sanitary restrooms, food was expensive and not bvery tasty, plus the seating was always nasty. These memories are not good, as I travelled from the West to Boston and took nearly 3 days. That was then, however travel by train today is very different. I have not travelled for many, many years by train, however I have been told it is the absolute way to travel now. High Speed at nearly 200 MPH, with very good food, and larger restrooms. You also may bring your auto on some trains. You may get where your going faster, and less expensive. The method of travel is better for the O-Zone, and using different fuels. That slows the demand of fossil fuels. Air Travel will be high, and getting higher all of the time. The mergers that have been talked about will help the Air Lines, but not the traveler seat will begin to rise higher and higer. As the story is told the wealthy will travel by air, and the average person and his family will travel by train, and save money. A real good report. I am glad to see that I am on the same page as the writer of the story. Well done !

You are right and wrong in several respects. The world has only just recently turned back right side up for the airline business; the story is similar to the rail story.

For 30 years after the 1978 deregulation, the major airlines were picked apart by the "little guys". Embedded union rules and labor costs were difficult for the major airlines to shed. The rails made the turn faster by shutting down or selling off thousands of miles of short line tracks and eliminating cabooses and employees.

The major air carriers have only recently been able to match the "little guys" costs on short feeder routes. Now that they can, using contract carriers, many of the "little guys" are in trouble.

The inflation adjusted cost of flying has fallen dramatically. More people can afford flying than ever before and like the trains, high fuel prices actually hurt the competition more. The cost for a single individual to drive a comfortable car across country has risen while many domestic flights are still cheap. After all an airplane is nothing more than a flying bus. As more people shed their big cars in lieu of small cars and mass transit systems, the demand for air travel will increase. There will be domestic and international consolidation which will increase the value of "nodes" by the laws of networking. This is an opportunity to go long, not to go short. Share prices fully discount the problems to the point that many carriers sell for less than the cash they hold in the bank.

Globalization has only begun. Globalization produces consumer surplus and producer surplus at the same time. Demand for international traffic has soared in recent years and this trend is still in the early stage. Thank you for your report. I have bookmarked your site.