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Monday
Sep222008

« These Really Are Dynamic Times »

In my most recent blog post, I postulated that we are not we are not out of the woods by any measure as oil had been closer to $90 per barrel than $100 in the past week. I am sure that there were some that scratched their heads over that post. Part of my reasoning for drafting the piece was that the markets had turned their attention to the banking crisis and away from the commodity world. The market's lack of attention typically makes me nervous.

I am not going to say I said I told you so, but today, oil spikes $25 amid anxiety over bailout news. The October contract ultimately settled near $121 per barrel, up more than $16 per barrel, far surpassing the one day record increase of $10.75 in early June 2008. The November 2008 contract is trading at more than $109 per barrel as I write.

Remember, these numbers do not reflect the crack spread price equivalent per barrel that needs to be included when considering the airline industry's cost of jet fuel. At last look it was $24 per barrel since falling from $44 per barrel as the hurricanes made their way toward our shores. Fundamental to the message in my previous post was the concept that this industry, and virtually all industries, will be facing volatile times that require the ability to remain nimble in order to navigate the ebbs and flows that we are sure to face. Remember, we have not started to discuss just how cold, or warm, it might be this winter.

Many of our parents speak about the gold standard. Today the price of an ounce of gold increased more than $44 per ounce for those that doubt the market’s view of our world. In the article linked to above, analysts interviewed cited a weakening dollar and short positions. Sounds familiar doesn’t it?

In my previous post, I suggested that this industry is just not in the position to accept a fixed cost, fixed fare or fixed anything environment given the dynamic nature of input costs that face this industry. I suggested that the boom and bust cycle that has plagued this industry must be addressed as the cycle is not good for any one stakeholder group.

We really do need to think about this.

More to come.

Reader Comments (2)

Definition of Fixed Cost = Costs which do not vary with level of output.

Definition of Variable Cost = Costs which vary directly with the amount of output produced.

Over the long run, all costs are variable.

Did you know pilot labor costs are almost all Variable. From a management perspective, pilot costs are already flexible enough to vary directly with output. like fuel....if you don't want to incur these variable costs, don't operate the flights.

If passengers are unwilling to cover the variable cost of fuel and pilotage, there is little choice but to reduce output.

It is not variable costs which need to fluctuate with the fortunes of the airline, it is the output the "choose" to generate during economic cycle they're in.

Output needs to vary much more than it does. They need a mechanism to side line "fixed costs" much more quickly than is currently available to them.

This risk should be thrown on to the financiers and manufactuerers not the employees, who are, by and large, variable costs.

09.23.2008 | Unregistered CommenterAnonymous

If this is where we are in the discussion, then there is very little I can say.

09.24.2008 | Unregistered CommenterSwelbar

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