Buckle Up

17 Apr

Anyone that has flown as of late knows the ticket inflation that has infiltrated almost every part of the traveling experience. Charges for baggage, change fees, beverage fees, overhead space fees, etc.. We have always wondered out loud how a flight to Florida from Chicago could be profitable at peak travel times for $100 round trip. Well, it turns out it wasn’t, and a Bloomberg article astutely points out the somewhat counterintuitive notion that high oil prices are actually the culprit for a turnaround in the profitability of the U.S. airline industry. In spite of fuel costs doubling over a 10 year period, airlines are on track for a record fifth consecutive year of profits. The reason for the profitability increase was that airlines not only became more lean and mean, flights were ¬†finally rationalized and thus consumers were forced to allow the airlines to charge more. However, most importantly the relatively high fuel cost made starting a new airline cost prohibitive thus finally driving bottom line growth in an otherwise unprofitable schizophrenic industry. We have to wonder if this industry example can be extrapolated into other industries where high commodity costs and low barriers to entry have led to great benefits to the consumer, but low to stagnant profit growth afforded to the producer. More stable profit growth means more stable underlying commodity demand and a compression of the amplitude of the boom/bust cycle that plagues all commodities. This type of shift would ostensibly bring smiles to Central Bankers faces everywhere.

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