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Getting Oil Out of the Equation

Why pretend the 800-pound gorilla is a rhesus monkey?

May 2008 By Denny Hatch
8
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In the News

EOS AIRLINES FILES FOR CHAPTER 11
Premium Class New York-London Carrier Forced to Wind Down Operations
Purchase, NY, April 26, 2008 – Eos Airlines, the premium class New York to London carrier, which has become known for its operational excellence and uncrowded Guest experience, announced today that it has filed a voluntary petition under Chapter 11 of the U.S. Bankruptcy Code. The petition was filed April 26, 2008 in the U.S. Bankruptcy Court in the Southern District of New York. On April 26, 2008, Eos plans to operate Flight 6 (8:30pm) from JFK to STN. On April 27, 2008, Eos plans to operate Flights 3 (1:00pm) and 7 (6:30pm) from STN to JFK. Flight 5 from STN to JFK and all flights from JFK to STN on April 27, 2008 are canceled. Eos will immediately implement a reduction in its workforce, eliminating the positions of most of its employees, and will cease operations entirely after April 27, 2008.
— Steven Alschuler, Linden Alschuler & Kaplan Inc., Corporate Press Release, April 26, 2008
It’s been a tough month for airlines.

The following went bust (in alphabetical order): Aloha, ATA, Eos, Frontier and Skybus.

In addition, the following airlines announced first-quarter losses: Alaska (-$35.9 million), American (-$328 million), Delta (-$6.4 billion), Northwest (-$4.1 billion), United (-$537 million) and US Airways (-$236 million).

Meanwhile, on April 29, Royal Dutch Shell and BP announced quarterly profits of $14.4 billion for the first quarter of 2008.

Consumers are screaming bloody murder about the cost of gas and double-digit increases in food prices.

Retailers are whining that sales are way off and the cost of goods sold is higher.

The culprit: $115+ for a barrel of oil.

This is the 800-pound gorilla in the American economy.

Everybody seems to be pretending it’s a rhesus monkey.

The Demise of Eos Airlines
The April 4, 2006, issue of this cranky little e-zine discussed the launch of Eos, an all-business-class airline with three Boeing 757s flying from JFK to London’s Stansted Airport.

Eos round-trip fares were $4,500, $5,500 or $6,500, depending on whether you booked 30 days in advance with a Saturday-night stay-over, 14 days in advance or walk-up. “Guests” were given free limousine service and waited in the sumptuous Emirates Airlines lounge with free booze and gourmet nibbles.

On board, passengers discovered the Boeing 757 that normally held 220 passengers was configured for just 48 people, each ensconced in a kind of mini-suite with world-class service normally found only on luxury corporate jets.

However, in the words of one traveler: “Although Eos’ load factors have been around 70% to 80% (that’s really good), my flight wasn’t even half full. (It was a Tuesday – typically a slow travel day.)”

A 757 drinks 1,110 gallons of jet fuel per hour, costing roughly $26,800 over the seven-hour flight. That’s $558 per passenger, assuming 100% load. A 50% load represents $1,116 worth of jet fuel for each of the 24 passengers. This is comparable to the old Concorde SST, which used 1 ton of jet fuel for each passenger on a trans-Atlantic flight.

Here is what I wrote April 4, 2006 in this publication:

Responsible for multibillion-dollar deals and mergers, the guy cannot show up in a Fortune 100 boardroom, gaga with jet lag after spending the night with his seat being kicked by a screaming kid.

But can an itty-bitty luxury class airline with just three 757s that charges fat prices from JFK to an itty-bitty London Airport attract enough high-rolling, over-the-pond commuters to have a viable business?

Takeaway Points to Consider:

* The price of aviation jet fuel has risen three cents a gallon since Tuesday, when I put this column to bed. As of Wednesday it was $3.49 a gallon.

* Chakib Khelil, Algeria’s energy minister and president of OPEC, said on April 28 that it was likely oil could rise to $200 a barrel and OPEC can do nothing about it.

* What is the high price of oil doing to the various facets of your business—cost of goods sold, delivery, etc.? What if it goes to $200 a barrel?

* It may be imperative for you to figure out a palatable way to pass the increased cost of oil on to your customers.

* If you are honest with your customers—rather than flimflamming them with smoke-‘n’-mirrors—they will respect you.

* “The consumer isn’t a moron. She is your wife.”
—David Ogilvy

* “Cheapness is not a strong appeal. Americans are extravagant. They want to feel that they can afford to eat and have and wear the best. Treat them as though they could not and they resent your attitude.”
—Claude Hopkins, circa 1920

* Put another way, an airline that charges too little raises the specter of cutting back on something—like maybe maintenance and safety.

Web Sites Related to Today's Edition:

Silverjet - low fare business class flights - London, New York, Dubai
http://www.flysilverjet.com

Jet Fuel Price Monitor
http://tinyurl.com/225djf

OPEC’s President Says Oil Prices Could Hit $200 a Barrel.
http://www.finfacts.com/irishfinancenews/article_101355.shtml

Gaebler Ventures on pricing
http://www.gaebler.com/Pricing-Methods.htm
 

Companies Mentioned:
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COMMENTS

Click here to leave a comment...
Comment *
Most Recent Comments:
tk - Posted on May 06, 2008
It's real simple. Well need to drill for more oil and build more refineries. The high oil prices are a result of policies from our modern day Democratic Party in conjunction with a increasing global demand for oil. Its too bad that president Clinton blocked oil exploration, drilling, and refining a decade ago.

Liberalism, it never works every time its tried.
Peter Rosenwald - Posted on May 04, 2008
Come-on Denny,

In trying to compare the cost of the gas you buy (at a known price and under your control) with your suggested fuel pricing based on total cost divided by the number of passengers (over which you have no control -- even the airline doesn`t) you are mixing monkeys and elephants.

Your suggested model is intriging but unrealistic on the fulfillment end. CDan you imagine the scenes at the check-in counter when the agent tells the passenger the plane is empty and he`ll have to pay the total fuel cost. OK, that's unlikely to happen but something like it surely will. It would make travel planning impossible.
There must be a better way. What ever happened to the rubber bands we as kides used to power our model aircraft?

Peter
JAFROMMEYER - Posted on May 03, 2008
If you look at http://www.infoplease.com/ipa/A0922041.html
you will see that (as of 2006), the US is the THIRD top world oil producing nation, however we are not in the top 14 for export of oil (obviously), and we are the #1 consumer of oil and the #1 importer of oil worldwide.

Where does America GET it's oil? According to:
http://www.energyrefuge.com/archives/where_oil_comes_from.htm
1. Canada
2. Mexico
3. Saudi Arabia
4. Venezuela
5. Nigeria
6. Angola
7. Iraq
8. Algeria
9. United Kingdom
10. Brazil

It seems that we Americans aim our anger at the middle east... we can aim a lot closer, if you ask me.

Here's the question of the ages: If it costs $100 to fly one-way from Philadelphia to Orlando, how and WHY could it possibly cost $200 to fly from Orlando to Philadelphia (one-way).
Airline pricing is a as confusing as hieroglyphics and involve so many variables that it seems inconceivable.

And lastly, in this round-about rant...
I say build 50 nuclear power plants, make electricity FREE, and give everyone an electric car. Screw oil.

Cheers.
Jon - Posted on May 01, 2008
The consumer may not be a moron, but a good percentage of voters were moronic enough to vote two terms for a president who had no energy policy other than subsidizing oil companies.

We continue to subsidize big oil by spending trillions in the Middle East to protect our "interests". But just who is profiting from that protection? Imagine the progress we could have made here in the US on solar, wind energy, plant-based fuels and half a dozen other alternatives with 3 trillion dollars of subsidies? And we would have been creating jobs for Americans and a future for ourselves.

The story of airlines trying to survive is just the precursor to the story of our own threatened survival. Getting oil out of the equation is where the answer begins.

For an interesting opinion on the subject in the larger sense that I've mentioned here, read Tom Friedman's column from yesterday's NY Times ?"As dumb as we want to be".
Dev. Kinney - Posted on May 01, 2008
Your headline is a little misleading, Denny. In the column you don't illustrate "Getting Oil Out of the Equation" but dealing with it. And that's what we have to do as Big Oil has established itself as ruler of the known universe. We have the auto industry and finally the Bush Administration to thank. There was a time when we could use the railways, better auto manufacturing, and serious environmental education to stem this domination, but too late now. It'll take decades.
David Pace - Posted on May 01, 2008
To quote from your list of quotes:

?Cheapness is not a strong appeal. Americans are extravagant. They want to feel that they can afford to eat and have and wear the best. Treat them as though they could not and they resent your attitude.?
?Claude Hopkins, circa 1920

Not only is this true, but so is the need for Americans and others to believe that we can traverse distances painlessly and in guaranteed comfort.

The fact is, the distance is the same now as it was a 100 or 200 years ago. Today we fly in an illusion that belies that we are actually traveling thousands of miles in sometimes a single sitting.

The airlines are also to blame for unrealistic expectations of air travel. I was a flight attendant for a major carrier for 20 years, both domestic and international, and the sense of entitlement and unrealistic expectations both passengers and often crew, even, had of the distances being traversed amazed me.

Thanks for your excellent thinking on this.

Dave
Fred Lederman - Posted on May 01, 2008
Denny-

Over the next five years, and probably beyond, the price of energy is going up. That's an irrefutable fact given the diminishing supply and the expanding demand from the West and ?Chindia?.

The business model of flying to meetings, conferences and sales calls will, out of necessity, have to change. So what should our business leaders do?

In all probability, they will be forced by bottom line pressures to use more technology such as video and web conferencing to better communicate with their prospects, clients and fellow associates. They will also have to dedicate themselves to improving their client relationships through true partnership agreements where each party bears some of the variable costs and passes the savings along to the customer. This has been an on-going part of the print business model for the past ten plus years as clients purchase their own paper and store it at their printer?s facility. Also, clients are more frequently directly paying the USPS for their mail programs and manage their own drop ship BMC, SCF or DDU logistics. Virtually every direct marketer is using multi-channel marketing programs in order to reduce their cost per contact/view with prospective clients.

As professional direct marketers we should be leading the transition to better, smarter and more relevant communications to our clients and prospects. By and large we are doing that but the 800 pound simian is getting larger every day. The next wave of successful businesses will be led by those men and women who ramp up their creative thinking and execution of new, more efficient and more effective business models. Carpe diem?.carpe moola!
Joy Lacho Eaton - Posted on May 01, 2008
I appreciate the math and your logic. Next flight I will reconsider the value of my fare! it is certain that rising Fuel costs will continue to dramatically impact the way we live and do business
Click here to view archived comments...
Archived Comments:
tk - Posted on May 06, 2008
It's real simple. Well need to drill for more oil and build more refineries. The high oil prices are a result of policies from our modern day Democratic Party in conjunction with a increasing global demand for oil. Its too bad that president Clinton blocked oil exploration, drilling, and refining a decade ago.

Liberalism, it never works every time its tried.
Peter Rosenwald - Posted on May 04, 2008
Come-on Denny,

In trying to compare the cost of the gas you buy (at a known price and under your control) with your suggested fuel pricing based on total cost divided by the number of passengers (over which you have no control -- even the airline doesn`t) you are mixing monkeys and elephants.

Your suggested model is intriging but unrealistic on the fulfillment end. CDan you imagine the scenes at the check-in counter when the agent tells the passenger the plane is empty and he`ll have to pay the total fuel cost. OK, that's unlikely to happen but something like it surely will. It would make travel planning impossible.
There must be a better way. What ever happened to the rubber bands we as kides used to power our model aircraft?

Peter
JAFROMMEYER - Posted on May 03, 2008
If you look at http://www.infoplease.com/ipa/A0922041.html
you will see that (as of 2006), the US is the THIRD top world oil producing nation, however we are not in the top 14 for export of oil (obviously), and we are the #1 consumer of oil and the #1 importer of oil worldwide.

Where does America GET it's oil? According to:
http://www.energyrefuge.com/archives/where_oil_comes_from.htm
1. Canada
2. Mexico
3. Saudi Arabia
4. Venezuela
5. Nigeria
6. Angola
7. Iraq
8. Algeria
9. United Kingdom
10. Brazil

It seems that we Americans aim our anger at the middle east... we can aim a lot closer, if you ask me.

Here's the question of the ages: If it costs $100 to fly one-way from Philadelphia to Orlando, how and WHY could it possibly cost $200 to fly from Orlando to Philadelphia (one-way).
Airline pricing is a as confusing as hieroglyphics and involve so many variables that it seems inconceivable.

And lastly, in this round-about rant...
I say build 50 nuclear power plants, make electricity FREE, and give everyone an electric car. Screw oil.

Cheers.
Jon - Posted on May 01, 2008
The consumer may not be a moron, but a good percentage of voters were moronic enough to vote two terms for a president who had no energy policy other than subsidizing oil companies.

We continue to subsidize big oil by spending trillions in the Middle East to protect our "interests". But just who is profiting from that protection? Imagine the progress we could have made here in the US on solar, wind energy, plant-based fuels and half a dozen other alternatives with 3 trillion dollars of subsidies? And we would have been creating jobs for Americans and a future for ourselves.

The story of airlines trying to survive is just the precursor to the story of our own threatened survival. Getting oil out of the equation is where the answer begins.

For an interesting opinion on the subject in the larger sense that I've mentioned here, read Tom Friedman's column from yesterday's NY Times ?"As dumb as we want to be".
Dev. Kinney - Posted on May 01, 2008
Your headline is a little misleading, Denny. In the column you don't illustrate "Getting Oil Out of the Equation" but dealing with it. And that's what we have to do as Big Oil has established itself as ruler of the known universe. We have the auto industry and finally the Bush Administration to thank. There was a time when we could use the railways, better auto manufacturing, and serious environmental education to stem this domination, but too late now. It'll take decades.
David Pace - Posted on May 01, 2008
To quote from your list of quotes:

?Cheapness is not a strong appeal. Americans are extravagant. They want to feel that they can afford to eat and have and wear the best. Treat them as though they could not and they resent your attitude.?
?Claude Hopkins, circa 1920

Not only is this true, but so is the need for Americans and others to believe that we can traverse distances painlessly and in guaranteed comfort.

The fact is, the distance is the same now as it was a 100 or 200 years ago. Today we fly in an illusion that belies that we are actually traveling thousands of miles in sometimes a single sitting.

The airlines are also to blame for unrealistic expectations of air travel. I was a flight attendant for a major carrier for 20 years, both domestic and international, and the sense of entitlement and unrealistic expectations both passengers and often crew, even, had of the distances being traversed amazed me.

Thanks for your excellent thinking on this.

Dave
Fred Lederman - Posted on May 01, 2008
Denny-

Over the next five years, and probably beyond, the price of energy is going up. That's an irrefutable fact given the diminishing supply and the expanding demand from the West and ?Chindia?.

The business model of flying to meetings, conferences and sales calls will, out of necessity, have to change. So what should our business leaders do?

In all probability, they will be forced by bottom line pressures to use more technology such as video and web conferencing to better communicate with their prospects, clients and fellow associates. They will also have to dedicate themselves to improving their client relationships through true partnership agreements where each party bears some of the variable costs and passes the savings along to the customer. This has been an on-going part of the print business model for the past ten plus years as clients purchase their own paper and store it at their printer?s facility. Also, clients are more frequently directly paying the USPS for their mail programs and manage their own drop ship BMC, SCF or DDU logistics. Virtually every direct marketer is using multi-channel marketing programs in order to reduce their cost per contact/view with prospective clients.

As professional direct marketers we should be leading the transition to better, smarter and more relevant communications to our clients and prospects. By and large we are doing that but the 800 pound simian is getting larger every day. The next wave of successful businesses will be led by those men and women who ramp up their creative thinking and execution of new, more efficient and more effective business models. Carpe diem?.carpe moola!
Joy Lacho Eaton - Posted on May 01, 2008
I appreciate the math and your logic. Next flight I will reconsider the value of my fare! it is certain that rising Fuel costs will continue to dramatically impact the way we live and do business