November 5, 2008
US airlines are groping for profits while travel budgets shrink and the global economy has slowed, but recessions bring a built-in consolation prize — cheaper jet fuel.
The remarkable recent energy price decline — a byproduct of the overall economic crisis — is somewhat ironic for the industry, given its years-long steady diet of bad luck and disappointing economic trends.
But for now, at least, one airline demon seems intent upon keeping another at bay.
“We in the industry now have a natural hedge against declining demand, in the sense that if macro-economic issues cause a decline in demand, they are likely to drive even lower oil prices,” said Scott Kirby, president of US Airways last month.
Kirby said each USD$1 decline in the price of a barrel of oil is worth USD$35 million to US Airways.
For years, the airlines have walked the fine line between stability and collapse due to the fears following the September 11, 2001 terror attacks and low-fare competition. Then, just as airlines began to recover, sky-high fuel prices threatened to undo progress made during years of difficult restructuring.
Early this year, the US airline industry looked poised for consolidation and more bankruptcies when the global economic crisis took hold and travel demand began to dry up.
But the crisis also brought sudden relief to embattled carriers as it dragged oil prices down from a record high. Crude oil, which touched an all-time high of USD$147.27 a barrel in July, has fallen some 53 percent in four months.
The decline came too late to spare the industry from third-quarter losses. The seven largest US airlines reported net losses of more than USD$2 billion on higher fuel costs and the diminished value of fuel hedges.
But airline executives were optimistic that less-expensive fuel and massive capacity cuts would offset the negative impact of falling travel demand.
“While the long-term impact to passenger demand from a slowing economy is not yet clear, we continue to believe the magnitude of industry capacity cuts should offset the impact of a weaker economic environment,” US Airways’ Kirby said in a statement on Wednesday.
Glenn Tilton, chief executive of United Airlines parent UAL, expressed the same optimism in an October 21 message to employees.
“The convergence of falling oil prices with our capacity flexibility, strong improvement on costs and competitive revenue put us in a position to make our margin and return United to profitability,” Tilton said.
Industry experts generally predict airline profits in 2009 despite ominous signs that economic weakness will further erode travel demand.
Jamie Baker, airline analyst at JP Morgan, said in a research note this week that he was anticipating the third-worst demand environment on record. But the “fast and furious descent” of oil may further bolster profits, he said.
Airline consultant Robert Mann was slightly more cautious in his assessment. He noted the multitude of factors acting on the price of jet fuel, travel demand and airline finances.
The correlation between fuel prices and the economy is tenuous, and airlines should not pin their hopes on circumstances beyond their control, Mann said.
“We’ve shown that airlines can gain pricing power when capacity discipline is in force,” he said. “As for natural hedging potential, it’s a bit of a fur ball, really.”
(Reuters)
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