SAS Saying Old Fuel Guzzler Auircraft are Cheaper to Operate

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The Scandinavian airline SAS: is saying that its MD-80s would still be cheaper to operate, even if the cost of fuel doubled.

It doesn’t make a whole bunch of sense, given that the cost of oil is at an all time high, until you look at this quote:

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

…

n its newly-released annual report SAS Group says the effect of capital costs means the MD-80 is SKr5-10 million ($0.8-1.6 million) more profitable to the carrier than newer aircraft.

Capital costs for the type are SKr20 million lower, more than offsetting the SKr10-15 million in higher fuel and maintenance costs.

(emphasis mine)

This is interesting not from an aviation perspective, but from a larger economic one.

It implies one of two things:

  1. That airlines going for the latest and greatest hardware are slitting their own throats, and that capital costs completely blow away operating costs.
  2. That the cost of capital today is high enough that upgradeing even with the historically high fuel prices, simply does not make economic sense.
  3. That they expect these planes to be used for surges in demand for seasonal and other reasons, and won’t the full utilization, and capital costs dominate.

The first reason is simply not credible. If it were, we’d all still be flying DC-3s, or at least upgrades 707s and DC-8s, since they take people to the same places just as fast.

That leaves reasons two or three, or reasons two and three.

From a macroeconomic standpoint, however, it’s reason 2, the cost of capital, that is most interesting.

This may very well be a major capital purchase that is being delayed because the capital markets have frozen up. That the increased risk premium that has resulted from the credit crunch simply make it too expensive to upgrade to better equipment.

That is how a credit crunch creates a recession, which makes the credit crunch worse.

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