Rising fuel costs may hurt airlines

The airline industry is one of the segments of the economy that is most vulnerable to steadily climbing oil prices. Fuel is a large part of the cost of running an airline and when fuel prices increase it cuts into an already thin profit margin. When fuel prices spiked in 2008, CBS News reported that for every $1 per gallon that the price of jet fuel increased, it cost each airline an extra $60 million per year.

Airlines coped with higher fuel costs in several ways. To passengers, the most obvious methods were fuel surcharges on tickets and adding fees for baggage. The companies also grounded older, less fuel-efficient airplanes, changed schedules to drop less profitable routes, and furloughed (laid off) employees as the demand for air travel decreased. Four years later, fuel costs are once again approaching 2008 levels.

Although the airlines were starting to finally recover following the 2008 oil shock and subsequent recession, it is likely that the current increase in oil prices will blunt the airline recovery. As oil prices increase, so will the price of tickets. Basic economic theory teaches that as prices increase, demand will decrease and the airlines will sell fewer tickets.

The price of tickets is not the only problem however. Rising oil prices also mean that other goods and services will cost more as well. If people are paying more to fill their car with gas, as well as more for food, energy, and practically everything else then they will obviously have less money to spend on airline travel. The same logic applies to business travel as well. If the business is paying more for other budget items, there will be less money to send employees on business trips. In many cases, new technology such as online meetings and teleconferencing can take the place of face-to-face meetings.

A Raymond James analyst told FlightGlobal .com that 2012 could be a good year for the airlines if they focus on profitability at the expense of market share. In essence, carriers would keep capacity low and focus on profitable routes while maintaining maximum efficiency. This means slow or no growth for most companies with hiring mainly to replace attrition.

How bad the situation will be for the airlines is directly related to how high the price of oil goes. If the price of oil stays below or near its 2008 high, then the effect on the airlines will be minimal since bankruptcies and cost cutting have already made them much more efficient that they were previously.

However, as the Atlanta Conservative Examiner notes, if the Iranian nuclear crisis results in a military strike or war then the price of oil could double or more. This would be catastrophic both for the airlines as well as the economy at large. In that case, the outlook for both airline profits and hiring would be extremely poor.

This article originally published on Examiner.com:

http://www.examiner.com/aviation-in-national/rising-fuel-costs-may-hurt-airlines

Election myth: Does the GOP want to ship jobs overseas?

The third common myth being spread by Democrats this election season is that Republicans want to send American jobs to other countries. This is an obvious exaggeration. No politician of either party would want to send his or her constituents’ jobs out of their district and to another country. You don’t get re-elected that way and, above all else, most politicians want to get re-elected.

The question then becomes how best to preserve American jobs. President Obama and the Democrats believe that companies who move jobs to other countries should be punished through higher taxes or the elimination of tax breaks. A bill currently stalled in the senate purports to do just that.

However, it isn’t only Republicans that oppose this bill. At this point, Republicans don’t have the numbers to prevent passage of legislation by themselves. Some Democrats, including Max Baucus, chairman of the Senate Finance Committee, have joined the Republicans and business groups in opposing the bill on the grounds that it will make US companies less competitive.

On the other hand, conservatives believe that American companies will create jobs in the US if the government makes it cost effective for them to do so. There are many reasons that companies outsource jobs, but one of the biggest is labor costs. American workers are highly compensated, especially when non-salary benefits such as health insurance are considered. Workers in less developed nations are willing to do the same work for much less money.

Regulation is also a factor. The US has a dizzying array of complex regulations governing everything from environmental concerns to zoning. Some of these regulations are needed and some are not. Good or not, the cost of complying with government regulations can be significant. Other countries may have a regulatory environment that is easier to navigate.

Obamacare provides a good example of both employment costs and regulation. First, the mandates for increased coverage in the health care law are increasing the cost of health insurance coverage for companies. There will also be penalties if employers do not provide coverage for their employees. Second, there are new regulatory requirements in the health care law as well. One of the most well known is a requirement that companies issue 1099s to any company or individual with which they do more than $600 of business. The massive new costs associated with hiring and providing insurance for American workers may prove to be a powerful incentive for companies to move operations to other countries.

Add to this that the United States has one of the highest corporate tax rates in the world, even before state and local taxes are considered. When all these factors are considered, the US appears to have a somewhat unfriendly business climate.

The news is not all bad though. The stability of the United States and its status as a large consumer nation do help to attract foreign businesses to our shores. The Kia factory in West Point, Georgia is one example of the “insourcing” of foreign businesses to our state.

There are answers to many of these problems. A true reform of health care with an eye toward lowering costs would be a major step forward. Easing the grip of unions so that wages can be determined by the market would also help. Lowering taxes would give companies much needed capital to grow their businesses. Finally, streamlining bureaucracy and eliminating the regulations that don’t make sense would also help.