Who hasn’t watched the price at the gas pump rise in the last few weeks? The funny part is when it comes to transportation, it is not necessarily the price of oil that wreaks havoc with transportation companies; but rather it is these price changes that are the problem. According to the US Energy Information Administration, in 2002, when oil was $25 a barrel no one would imagine that the airlines would be profitable when oil is trading over $90 a barrel. However, here we are in 2013. Most US airlines are profitable and oil traded today for $107 a barrel.
The reason – oil maybe expensive, but the at least the price has been relatively stable climbing slowly from $70 to $110 a barrel over the past five years, compared to 2007 when oil went from $60 to $130 a barrel in the same year. In no way is todays price optimal, but at least it is easier to budget for.
Of course, the airlines still spend millions of dollars annually trying to protect themselves from the changes in the price of oil. For example, according to United’s 2013 1st quarter earnings call United is planning on spending $11 to $12 million on hedge premiums. This is simply money that is spent by United to help protect its self from price fluctuations and has no other value and is eventually just wasted. It isn’t used to power airplanes, pay employees, or build better terminals; it is simply just to protect what the airline pay for fuel.
Of course, another step United is taking is replacing its fleet with more fuel efficient aircraft. Again according to United’s 1st quarter earning’s call; United retired five older 757’s & 737-500s this quarter and replaced them with six new, more fuel efficient, Boeing 737-900s. In the second quarter, United is planning on retiring 12 older aircraft and again replacing them with six more Boeing 737-900s.
Then again, we have Delta that went out and actually bought an oil refinery in Pennsylvania for $150 million last year (I am anxiously awaiting Delta’s 2nd quarter earnings call to hear about performance of the refinery). So airlines will take all sorts of steps in order to protect themselves from fluctuations in the price of fuel.
Of course, then we have trains, which oil prices are turning into both a problem and a blessing. For operating trains, just like airplanes, operating costs go up as the price of fuel goes up. However, with higher oil prices fracturing in the US and Canada have become viable, and as a result rail also is reaping the benefits of transporting that oil. Well, until a pipeline is eventually built.
In fact, every modern form of transportation is pretty much dependent on oil from the lawn tractor to cruise ships. There are certain exceptions, such as the sailboat or the electric car. However I think the age of the schooner is over and while I am impressed with Tesla, the electric car still has yet to edge out the gasoline engine. Then there are public buses powered by natural gas. However, for inter-city travel we are pretty much at the mercy of oil.
Of course there is one form of inter-city passenger transportation that can actually be powered by natural gas, coal, hydroelectric, wind, solar, or even nuclear. China has figured it out and so has Japan and Europe. Even Amtrak gets it, but not the average American. It is simple – Electric trains.
Granted the infrastructure costs for electrifying a rail line is enormous. However, once the infrastructure is built the cost of operating trains over the electrified corridor is a lot less than a comparable line operated by a diesel locomotive. Think of it this way, a diesel locomotive not only needs to pull its payload; but also the weight of the necessary generators, motors, and the weight of the fuel for the whole trip. An electrified train need only carry the electric motors and its payload.
However, what is more important is that the price of electricity is much more stable than the price of oil. After all, for the most part the price of electricity is regulated and can be drawn from different sources.
Not so with oil.
So what do electric trains have to do with the airlines hedging against the price of oil?
It is actually pretty simple. Jet engines are only powered by jet fuel. We might be able to create jet fuel from other sources than crude oil, but there is no possibility in the near future of a jet airplane being fueled by electricity, natural gas, or nuclear. However, on flights less than 400 miles high speed rail can be a viable substitute for the airplane. The only thing that needs to be done is hook up a high speed rail to the airports as Europe and Asia has done.
This way, instead of United Airlines having to hedge fuel or buy brand new aircraft to fly passengers from Minneapolis to Chicago, or Washington to Newark, or even Los Angeles to San Francisco; United could build or simply contract with a high speed rail provider. United will not only cut its operating costs, but has actually stabilized part of its energy bill. Again, those trains are now plugged into the grid and can be run on natural gas, solar, hydro, nuclear, or even wind.
Heck, with less demand for jet fuel, it might even reduce the price of jet fuel for that connecting flight from Chicago to Shanghai. Ok maybe that might be a bit far-fetched, but one thing is for sure – the price of fuel is going to continue be volatile and go from $70 a barrel to $170 a barrel, then back down to $80, and then back up even high than $170. To me, high speed rail is one of the few way airlines can reduce their exposer to the wild oil price fluctuations.