Andrew Martin Global Outlook Blogger

Warren Buffett, possibly the world's greatest investor once said: 'Indeed, if a farsighted capitalist had been present at Kitty Hawk, he would have done his successors a huge favour by shooting Orville down”.

Really, who would bother owning an airline?

In light of the recent spate of airline disasters it is increasingly obvious that that industry is in for a very rough ride, so put on your seat belts and get strapped in for the ride of your life!

The short lived Brisbane based airline, Air Australia, a new budget airline entered into voluntary administration after just four months of operation.

While Air Australia most probably suffered from poor management it gets added to the long list of airlines to reach the aviation graveyards.

Further abroad American Airlines' parent company AMR filed for Chapter 11 bankruptcy protection late last year citing to cut labour costs in the face of high fuel prices and dampened travel demand, capping a prolonged descent for what was once the largest US carrier.

The airline was hoping to secure ‘long-term viability' by improving costs, reducing its debt burden and trying to be more profitable amid rising jet fuel prices.

While some analysts are confident in the future of American Airlines it seems the industry is riddled with a history of failure and restructuring.

Most of the major airlines in the US have at some point filed for Chapter 11 bankruptcy.

Since the attacks of September 11, 2001, Hawaiian Airlines, United Airlines, US Airways (twice), Northwest Airlines and Delta Air Lines have all filed for Chapter 11 protection, which permits reorganisation while under protection from creditors.

Closer to home, Qantas profit dropped 83 per cent amid strikes and high fuel costs.

Qantas spokespeople have said it will close some international routes and cut almost 500 jobs after its profits were hit by an industrial dispute and rising fuel costs.

The carrier made a net profit of $42 million Australian dollars for the six months to the end of December.

This was down from A$241m during the same period last year.

The result was ‘pleasing' to CEO Alan Joyce where $194 million of write downs came from the strikes last year.

Does he know something we don't!

Fuel costs increased 26 per cent to $2.2 billion during the period.

Qantas has been doing well on national routes it's the international operation that is causing concern amidst slowing demand and increased competition.

While in New Zealand, Air New Zealand has posted a $60 million drop in profits as well as potential job cuts.

All this doesn't bode well for an industry where 35-40 per cent of operating costs are jet fuel.

The long term trend is: crude oil is going up and there is not much anyone can do about it amidst the decline on global oil production.

So where does this leave the airlines?

In the light of no significant breakthroughs in technology and marginal efficiencies in aircraft design and operation there is only one thing airlines can do, put prices up!

Qantas has already started a round of price increases with fares on domestic and international routes in response to increased fuel costs and carbon pricing schemes in Australia and Europe.

International fares booked in Australia will rise by as much as $60 and domestic fares will rise by between $3 and $6.

It is mind boggling when we realise the amount of money airlines spend on fuel.

Qantas' fuel costs for the six months to December 31 were $2.2 billion, up by about $450 million on the previous year.

As of February 15, one-way surcharges on flights from Australia to London and Frankfurt will increase by $60 to $350, and on flights to the United States the one-way surcharge will also rise by $60, to $310.

Qantas said carbon pricing in Australia from July 1 will have an estimated cost to the group of $110 million to $115 million in the 2012/13 year.

Airlines are also now included in the European Union's emissions trading scheme, which will cost Qantas an estimated $2.3 million in 2012, it said.

Qantas will introduce one-way carbon surcharges from July 1, ranging from $1.82 to $6.86, depending on the flight distance.

The International Air Transport Association (IATA) outlook for the airline industry simply confirms the obvious.

The entire global airline industry only generates $4 billion in profit (most of this is questionable), considering the revenues it generates of $600 billion this is a return of just under 0.006 per cent.

I don't think Warren Buffett would be investing his hard earned in this sector somehow.

Many of the major airlines are adding of have already tacked on fuel surcharge levies, these don't recover higher jet fuel costs but they also impact demand, particularly for the more price-sensitive leisure travel.

To make matters even worse for airlines the EU now requires airlines operating out of all airports in its 27 member states to financially offset their flights' carbon dioxide emissions.

The move brings aviation into the EU's existing Emissions Trading Scheme (ETS) that has been applied to many other industries since it was first implemented in 2005.

This is no real surprise as this was only a matter of time as air travel is one of the most damaging forms of transport in terms of carbon emissions.

While some countries oppose the ETS and wrangle to get out of it any such scheme the EU is firm in its stance and most probably we will see a global ETS on airtravel.

So all in all the airline industry is a high polluting basket case that really doesn't make much money. So why bother?

The associated benefits such as tourism make airlines important national assets as they foster trade and bring many spin offs to countries such as New Zealand.

Hence, we see governments help support debt ridden failing airlines all over the globe.

So where does it stop? How much money and capital can governments afford to continue pouring into such dismall investments and who would be stupid enough to buy an airline moving forward?

The most likely scenario is that air travel (possibly within the next decade) will return to pre-1970 levels where tickets were expensive and only the well healed could afford an international flight. That's why it was called the ‘jet set'.

It is ineviatable we will see further contraction of the airlines industry over the next decade as increasing fuel prices will continue to savage the industries bottom line.

It is interesting to note that Richard Branson is one of the few (publically) that is recognising the seriousness of ‘Peak Oil' and has said in the British Press: 'The next five years will see us face another crunch – the oil crunch. This time, we do have the chance to prepare. The challenge is to use that time well, our message to government and businesses is clear: act.”

He says in a foreword to a new report on the crisis: 'Don't let the oil crunch catch us out in the way that the credit crunch did.”

When people like Branson are recognising the supply contraints of oil we know we are entering a new paradigm of energy descent.

Like many things in life, there are cycles, we have seen the rise of the airline industry from almost nothing in the 1950s to today where most people in the West can afford a domestic or even an international ticket.

As we face a new era and move into harder to get more expensive oil we will ineviatbly see the gradual decline and consolidation of airlines, unless someone can work out how to fuel planes with something other than jet fuel.

When you want to see what the future holds watch what the smart money is doing.

This brings me back to where we started.

Who better to examine than the world's most successful investor, Warren Buffett.

In 2009 Buffett invested over $34 billion into Burlington Northern Sante Fe (BNSF) rail network, his biggest investment to date.

BNSF is the second largest rail network in the USA owning over 400 different railroad lines.

Buffett obviously sees synergies and increased efficiencies as the way forward with rail transport being around five times more efficient than road based transport, with air travel is not even worth a mention. So we have come full circle.

The airlines are likely to play a secondary role (for those that can afford it) while rail and shipping will manage the bulk of long haul passenger and cargo transport.

So enjoy the low air fares while they last!

A.D. Martin is the author of ‘One ~ A Survival Guide for the Future…' (Available at Marbecks and Dymocks Tauranga) and publisher of an online blog that discusses economic, energy and environmental issues that will impact individuals and society over the coming years.