Raise the Hammer
On August 10, MSNBC carried an article on fuel shortages in North American airports.
Airports in Arizona, California, Florida and Nevada recently came within a few days — and at times within hours — of running out of jet fuel.
Because of supply bottlenecks, airlines were forced to fly in extra fuel from other markets and scramble for deliveries by truck.
According to the article, airline executives believe the problem is due to industry infrastructure not keeping up with growing demand. It's true that air traffic has finally returned to pre-9/11 levels after four years, but the industry is still deeply in trouble, with several major airlines already bankrupt or expected to go bankrupt in the near future.
It seems counter-intuitive that an industry can be simultaneously growing and struggling economically, but the missing factor is the rising price of jet fuel. According to the article:
the near shortages underscore the added strain on refineries, pipelines and the airlines' own fuel procurement efforts as the industry recovers from its worst-ever downturn — June passenger traffic was up 4 percent from 2001 levels, according to industry data — and energy demand rises throughout the economy.
New investment in U.S. oil refining capacity is way down, even though the proportion of sour crude (which needs to be refined more heavily) coming to market is rising. The existing refineries are running full-bore with no spare capacity, and breakdowns of aging machinery are causing supply disruptions.
Bob Sturtz, general manager of fuel at United Airlines, warns, "If more effort isn't put into resolving some of these issues, it could have serious impact on the operational integrity of the whole aviation system."
Usually, when a system is running at maximum production and demand continues to grow, capital flows into the system to increase capacity, but this doesn't appear to be happening with the refineries. Granted, part of the current bottleneck is due to seasonal factors, but the overall consumption of oil continues to grow at two percent a year, meaning the problem will be that much worse next summer.
At the same time, none of the ten biggest airlines expect to make profits this year, in spite of strong sales during the summer months. According to a The Dallas Morning News article, futures contracts for crude oil remain very high for years ahead, indicating investors expect high prices to stay.
Analysts believe Delta Air Lines and Northwest Airlines will go bankrupt soon, and that American Airlines and Continental Airlines aren't far behind. United Airlines has been in bankruptcy protection for the past three years. Vaughn Cordle, chief analyst at AirlineForecasts, believes "The legacy carriers are unsustainable in the long run."
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