Airline Outlook

Megan McArdle recently wrote a column blaming the price consciousness of air travelers for today's packed and uncomfortable aircraft.  I address this issue in my upcoming book, but look to high oil prices as the underlying cause of recent changes in the airline business.

 Here's the basic reality: In 2003, jet fuel costs equaled 13% of airlines revenues.  In 2014, it was 33%.

With such increasing costs, airlines can respond principally by increasing load factors, using denser seat configurations (principally on newly delivered aircraft), using fewer, but larger, aircraft, and reducing the number of departures. And this they have done. That's why flying is so inconvenient and uncomfortable right now.

US Commercial Airline Departures, Monthly, Thousands, 1996-2014 Source: Bureau of Transportation Statistics

US Commercial Airline Departures, Monthly, Thousands, 1996-2014

Source: Bureau of Transportation Statistics

Now, given the recent collapse in oil prices, we would expect passenger numbers to increase by 8-11% this year, and by 25% over the next three years: the airline business will recover from, in effect, depression-like conditions, with departing flights currently 40% off trend.

Such recovery should therefore be robust. It would ordinarily be accompanied by a drop in load factor of approximately 10 pp (from around 83% to 73%), and a decrease in average seats per aircraft from 114 presently to around 100.

However, should this occur, the number of departures just skyrockets.  Such a development would leave the US about 1,000 commercial aircraft short over the next three years. For purposes of comparison, Boeing delivered 723 aircraft last year.

As a result, load factors will tend to stay high, average seats will decline only modestly, and departures will still soar.  Here's one scenario, in which departing passengers recover trend by 2018, load factors decline only 2 percentage points, and average seats / aircraft ease by only 4, to around 110.  Note that the number of departures still soars, recovering the 2005 peak in 2017, and setting new highs thereafter. 

Revenue Passenger Ton Miles and Departing Flights, 1996-2018 Source: TransStats and Author’s Forecast

Revenue Passenger Ton Miles and Departing Flights, 1996-2018

Source: TransStats and Author’s Forecast

Look ahead, and our air travel system will become overloaded from mid-2016 and really congested by 2017. We are facing a general transportation infrastructure crunch, with the worst of it to be absorbed by the air travel business.

This, of course, assuming oil prices stay low.