1400 Words on The Airline Industry
The Numbers. In 2007, The United States used 20.7 million barrels per day (mbpd) of crude oil and petroleum products. About 2.2 mbpd of this are considered Natural Gas Liquids or Liquified Petroleum Gases. The other 18.5 mbpd of crude oil is refined into three main products – gasoline, diesel fuel, and kerosene-type jet fuel. Roughly speaking, these products are produced and supplied as follows: 9300 thousand barrels per day (kbpd) of gasoline, 4200 kbpd of diesel fuel (a category which includes both the liquid transportion fuel used in most large trucks and the home heating oil), and 1600 kbpd of jet fuel. The remaining 3 or 3.5 mbpd of crude oil is refined into various miscellaneous products. [as we shall see, this 1600 kbpd or 1.6 mbpd of jet fuel is the equivalent of 4500 Boeing 747 transcontinental flights from Boston to LA per day]
Recent Changes. Work I’ve done recently shows jet fuel demand down substantially in the first 5 months of the year. It continues to fall and presently is about 10% below last year’s levels. Jet fuel demand, unlike gasoline has not shown consistent gains over the last decade and flutuactes erratically, although an overall seasonal pattern is discernable. In comparison, gasoline consumption usually increases by a fairly steady 1 or 1.5% per year. It is down 1% so far this year from the same period last year.
“Over all, the number of scheduled flights in the United States dropped 3 percent in May, or 22,900 fewer flights than in May 2007, according to the Official Airline Guide.”
-New York Times
Using these numbers we can quickly see that there are about 9,000,000 commercial flights per year in the United States or about 25,000 per day. This number is much higher than the 4,500 number I have derived – reflecting the more diverse realworld picture of many different sized planes flying different distances. This number probably includes some very small planes, but also omits private flights (of which there are a huge number and chartered flights). The details of the number, distances and types of flights is beyond the scope of this introductory analysis. What is important for now is the overall level of travel and how it is changing with a rapidly increasing oil price. In a second installment, I’ll attempt to delve deeper into the numbers regarding different types of planes and their fuel efficiencies.
The Airlines – Part II Using numbers from The Air Transport Association, it appears that about 840 million people fly every year. The US only has a population of 300 million, so obviously some people are flying more than once. It is unclear whether this number is counting the number of times a passenger boards a commercial flight, the number of complete one-way trips, or round trips. But simply dividing 840 million by the 9 million flights yields about 90 passengers per plane. It is unclear what percent of total capacity this represents or how many seats have remained empty. A heavy reduction in flights nationally probably won’t reduce the availability of long distance distance travel between major hubs, just the convenience of multiple flight times and obviously the pleasure of a near empty plane. As with many things in the American economy, there is a lot of slack and a lot of gains that can be achieved quickly through the elimination of obvious waste. One note of interest is that most of the large commercial jets (Boeing and Airbus) I looked at have seating capacities of 150, 200, or above, so clearly there must be a lot of spare capacity actually flying or a huge amount of flights are done on much smaller planes.
Tickets and Pricing. Looked at differently, these same numbers produce another result. If we use the rough numbers of 1.6 mbpd of jet fuel, 25,000 flights per day, 90 passengers per flight, and $4 per gallon of jet fuel, the average cost per passenger is $120 per flight. If this on average makes up (according to industry sources) 40 percent of the cost of each ticket, then the average ticket price is $300. Assuming that all fuel charges eventually get passed on to the consumer, a doubling of the fuel price from $4 to $8 will result in a 40% increase in the cost of flying (an extra $120 over $300).
Now let’s look at some actual numbers. These are one-way prices based on sample round-trip prices. All flights have been scheduled for the same 2 weeks in September. I’ve provided a high/low range and typical plane types from samples on Orbitz. Boston to L.A.:$208/$288 (757/737), LA to Honolulu $155/$400 (757/737), Chicago to Milan: $400/$550 (A330/A340). As you can see these prices fit in nicely with the “average” base case I’ve used above. I didn’t try to make anything match or fit, I did this completely independently. For the record I did this first almost a week ago for the same cities but some other time-frame (near but not exact). I got prices at the time as much as $100 different in either direction.
Something positive may happen with efficiency. News concerning drastic cuts of flights by the airlines and some carriers going bankrupt and completely out of business may in fact be a good thing in a few ways. For the previous year, prior to the latest explosion of oil and fuel prices, the big news in the airline industry was the horrendous on-time record of all the major carriers, every manner of airport and runway delays, and a very dissastisfied American customer. It is hard to see how a reduced number of planes in the sky could have any effect but to lower jet fuel usage in two ways. First, obviously, there will be less flights. But the reduced amount of traffic in the air should reduce the amount of jets idling on runways, circling in landing queues around congested hubs, and lower the overall gate-to-gate time for the planes that are flying. If recent news about American Airlines is any indicator, the carriers will be retiring and scrapping planes – most likely the older, less efficient models.
The problem of plateauing production and the demand-destruction fallacy. Before I wrap up this introductory piece on the airlines, a word about the history of efficiency and the reality about American oil usage. It is often pointed out that oil usage increased throughout the days of stagflation in the 1970s and coincident with and following the second oil spike of 1979-1981, oil consumption fell by 15%, from which point it took 15 years for it to return to its highs. Conservation, massive gains in efficiency, and a transition in the energy mix are all correctly cited for this “slowing” of consumption growth. But let’s take a closer look at an important statistic. Oil use per capita.
In 2007, The United States used a little over 25 barrels of oil per person. In 1969, the figure was 25.6. It bloated to about 31 barrels in 1978 before dropping to a low of 23.8 in 1983. 25 barrels per year is the equivalent of 2.9 gallons of gasoline per person per day, or every single person driving alone 87 miles each day in a car that gets 30 miles to the gallon. This is the highest of any large, industrialized nation on earth. To put this in perspective consider the next highest contestants on the list. Japan: 15, Germany: 12, UK: 11. China, the latest big consumption story, only uses 2 barrels per person per year.
So for all the talk about efficiency gains, we still use as much person as we did 40 years ago and we’re still Number One. Good Job.
The following chart shows the likely forced gains assuming highly probable population growth of 0.8% per annum and a 1% yearly reduction in oil use in 2008 and beyond. We should be hoping for more drastic changes like those in 1979-1983 which might actually drive the message home.
What will be interesting to watch is what will happen in an environment of a growing global economy and plateauing or decreasing oil production. Any excess supply created by demand destruction in the United States will be quickly devoured elsewhere. All exports are up for auction. How long can we afford the highest bid?
Part II In the second installment, I’ll be taking a more detailed look at planes, their specifications, and how they are mixed in the international fleet. I’ll be looking more closely at their fuel usage. And finally I’ll be looking at the airlines themselves and their sorry record.
The Jetmakers by Charles D. Bright
[ Note: I made a huge mistake (or omission) is these admittedly rough calculations. I know Idid not figure in military consumption because it is only a small percentage of the number. However, I made the assumption that everything else was basically commercial passenger travel. I completely neglected to figure in commercial cargo/freight flights such as Fedex, UPS, USPS, and probably a thousand other carriers. I will be correcting/addressing this in future updates and pieces.]