EVs will help airlines.
The airline industry is not for the faint-hearted investor. A week doesn’t go by without stories of impending financial ruin and route cancellations juxtaposed with stories of rapid growth and huge aircraft orders. Aviation is a yo-yo space to invest in. Over the medium or long term, though, this industry has shown consistently low margins and is a tough place to survive.
As a casual observer and airplane geek, I have often wondered if there is any other industry with so many hurdles and hoops to navigate. If oil prices go up, the airlines suffer. If there’s a storm, it costs the airline. If a patient falls ill on a flight, necessitating an emergency landing, it costs the airline. Essentially, anything that goes wrong becomes a financial liability for the airline. There’s nobody else taking the blame and shouldering the costs. This makes the aviation industry a truly unique space, one where making money is a struggle at the best of times. So what does this all have to do with electric cars? Let’s talk about oil.
Oil & Airline Deaths
Over the past decade, oil prices have fluctuated wildly. Macro data shows that oil prices in 2008 fell 53% from the year before. In 2009, they rose 78%. 2014 and 2015 saw 45% and 30% falls, followed by a 45% increase in 2016. When I call aviation a yo-yo industry, a lot of it has to do with oil prices. As a financial planner for an airline, cost forecasting is a true headache. It is near impossible to figure out how much to charge a customer for a route. It is for this reason that airlines usually on the razor-edge, financially, fall like flies the moment there is an upward surge in oil prices. India’s Kingfisher Airlines breathed its last in October 2012. European low cost carrier Primera Air actually ceased operations while some planes were still flying in October 2018. Sudden increases in oil prices kill airlines. A 2014 article in the Economist reveals that over six decades of aviation, the average return on capital was just 1%. Yes, a lot of that period was spent in discovering how to run the business and we had years of subsidized national carriers, built to serve political and other economic aims. The fact remains that in six decades, profits have remained virtually elusive. Which brings me to the crux of this article. The electric vehicle will do two things. It will permanently lower oil prices through reduced demand, and, it will lead to improved electric power technology which will eventually have an aviation application.
EV Penetration = Oil Glut
An article by Ross Tessien, an EV and renewable energy expert, suggests that a major oil glut is on the horizon. Recent history tells us that in 2014, over-production of oil to the magnitude of 1.5 million barrels per day led to the huge crash in prices that followed. With each new electric vehicle replacing a new internal combustion engine (ICE) vehicle, a million barrels per day reduction in oil demand could occur by 2022. Unlike 2014, however, this glut will begin through reduced demand rather than over production. The important thing to also note is that this reduction in demand will be permanent. By 2022, it is likely that an electric car will be cheaper to buy than an identical oil powered version due to battery cost reductions and inherently less complex mechanicals. Today, in 2018, the Tesla Model 3 matches the BMW 3 series in price across the range from $40,000 to $80,000 depending on variants. It stands to reason that the next-generation of the Tesla will be 10% to 20% cheaper than the Bavarian Ultimate Driving Machine. As EVs become cheaper, the glut will become the new normal. Remember that oil producing nations are driven by self-interest and will be unlikely to cooperate with each other. Even if they do, and prices stabilize through reduced production, demand for oil from transportation will continue to fall until zero and it will never come back.
Aviation loves EVs
For aviation, this means that fuel, which currently accounts for 19% to 30% of their costs, will stabilize. If prices stabilize at the lower end of that range, airlines will be able to keep costs consistent and actually make some money. For an industry averaging single digit margins, every drop in the cost of fuel really does make a difference.
As far as improved electric power technology, companies are already forecasting that regional airplanes that run on electricity might be flying within a decade. easyJet, Europe’s second largest low cost carrier aims to cover routes under 500km/300miles with electric aircraft by 2027, now just 8 years away. The advent of such aircraft will be directly related to EV penetration. As EV technology improves, the cost, weight, energy density, performance and longevity of battery storage will improve. These will all make electrification of flight possible, even if it is done partially. Imagine flying in a plane that’s fueled by stored solar energy. Since airlines turn over billions of dollars, investment in these renewable technologies will not be difficult for them, especially if it means permanently reduced costs.
Transport Revolution Realized
To summarize. The EV revolution, which has well and truly begun, will end up being a transport revolution. History shows us that disruptive technologies tend to ramp up quickly after the initial players begin to show results. Recent sales volumes from Tesla and launches by other companies suggest that the world is at this exact ‘ramp up’ point. For EV penetration it’s all up from here. For the oil giants of this world, that means a lot of pain, bankruptcies and, perhaps, political ramifications. And for the CEOs of the world’s airlines, there may be an electric light at the end of the tunnel.
Sources:
https://seekingalpha.com/article/4225153-evs-oil-ice-impact-2023-beyond
https://www.macrotrends.net/2516/wti-crude-oil-prices-10-year-daily-chart
https://www.statista.com/statistics/591285/aviation-industry-fuel-cost/
https://www.economist.com/the-economist-explains/2014/02/23/why-airlines-make-such-meagre-profits
