24 December 2010

'Tis The For Crystal Ball Gazing

Oil is not likely to come down in price to any major degree in 2011.

This post is going to discuss the impact of high oil prices as a factor in 2011.

This one has kinda crept up on us. Oil is now cresting above $100 a barrel. With the severe weather across Europe battering Airports and other uses of oil for transport alike - we are likely to see a peaking and spot shortage of fuels across the northern hemisphere this winter. After when the spring season hits the North it is not likely to moderate to much extent. This is going to have a knock on effect.

I believe that air ticket prices are going to stay high. This will in turn drive the need for Fuel surcharges. I believe the airlines will flex their YQ/YR muscle and raise those rates. Remember that after the peak pricing in 2008/9 the Fuel surcharges only moderated a small amount.

With Fuel consuming a larger percentage of the airline cost base - the amount of available flexibility on airline pricing will lead to restrained capacity growth, particularly among the legacy and high cost carriers of Northern Europe and North America. Those with aging fleets - particularly the US Carriers will feel this pain more than others with younger fleets. This sets up a long term conflict with the aircraft manufacturers. Both Airbus and Boeing have recently upped their short term production rates. But where are those planes going? Expansion in Asia/Pacific who demands keep rising. I saw an amazing statistic that saw Beijing add a higher rate of cares to the city that already has the worst commute (tied with Mexico City). The official Xinhua News Agency said 30,000 new vehicles were registered in the past week alone, at least three times the normal rate.

Airbus actually has more flexibility as it has 3 production lines running in separate areas - China, Hamburg and Toulouse for the A320 family. Boeing is actually running at full capacity on the 2 737 lines in Renton. I spoke with a senior manager there over the past few days and he opined that the current run rate can only be marginally improved without significant changes to the work flow and supply chain. That requires infrastructure change such as more plant or another line. Neither is going to happen any time soon.

The reason I point these out is that China is going to really start competing with the USA as a huge importer of oil for domestic consumption. And the US airlines do not have the resources to significantly reduce their fuel burn rate and cost.

Despite Skype's well publicized outage on December 22nd we are going to see a lot more traffic exit from the higher yielding business travel. But that is not confined to just business travel.

The use of Skype and GoogleTalk is growing fast and we can expect others to adopt similar technologies. This means that we will have SMEs and personal consumers adopt live real time personal and small group interaction via video. The upcoming deployment of 2 cameras in the iPad 2 will mean that Facetime will have a much broader and viable usage.

The growing divergence of meeting cost - real presence rising costs and virtual presence diminishing costs will mean a permanent leakage of the former to the latter.

Bottom line the elasticity of demand will be low and it will be a supply market in the USA. In turn this will favor the supply side. It will also significantly favor non-oil based communication solutions such as tele-presence and other comms based solutions.

That my friends is not going to favor those who are intermediaries in my view.


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