Commodity Oddity: Falling fuel prices are a dream come true for airlines, right? Not so fast

Nothing is more important to an airline’s fortunes than the price of oil. Nothing. So theoretically, nothing should make airlines happier than a fall in the price of oil. Right?

Maybe not.

The price of oil is indeed falling, and the price of jet fuel along with it. This week, the WTI benchmark price briefly sank below $80 per barrel before ending up at $83, a giant 22% tumble from its average price a mere four months ago. The Brent benchmark too, which often correlates more closely with worldwide jet fuel prices and for a while traded at a large premium to WTI, is now just $3 per barrel more expensive, down 23% from June.

For an industry whose cost base is so dependent on one commodity, a price drop of this magnitude can have dramatic consequences. Last year, according to IATA, the world’s airlines spent $210b on fuel, amounting to a full 31% of their total operating expenses. So all else being equal, a sharp decline in the industry’s No. 1 cost will have at least some positive effect on the bottom line.

But all else is not equal. When oil prices fall, revenues tend to fall too. Remember 2008? In the summer of that year, oil prices reached astronomical heights, leaving airlines with no choice but to repeatedly raise fares. Then came the global economic meltdown, during which oil prices collapsed, but so did the industry’s pricing power. In the autumn of 2014, the global economy isn’t quite collapsing, but the mounting evidence of its weakness is similarly having a double impact on airlines: oil prices are falling, but so (in some markets, anyway) are fares. True, the recent softness in energy markets is partly a supply phenomenon as U.S., Libyan, Iraqi, Saudi and even Russian oil output increases. But it’s at least as much a demand phenomenon as slowing economies like China, Japan, the eurozone and Brazil reduce their oil consumption. The year 2009, by the way—when the average per-barrel price of WTI oil plummeted to $62 from $100 the year before—was not a good year for most airlines. Just the opposite, in fact.

Over time, the savings from cheaper oil—in addition to being partly or totally negated by lower airfares—also gets eaten away by other stakeholders. If a short-term profit spike does emerge, labor unions will demand a greater piece of the pie. Governments will feel they have more leeway to raise taxes, fees and charges without dramatically affecting their nations’ air…

To purchase this issue Click Here.

Click Here or the button below to sign up for a Free Trial.

This issue is not currently online. To inquire about purchasing a copy, please email subscription@skift.com.