After the Fall: Collapsing fuel prices are a big gift for some airlines—but remarkably unhelpful for others
After eight days of pouring rain, the sun is shining bright. But you’ve got the flu.
That’s how airlines felt in late 2008, when after eight years of punishing fuel prices, prices suddenly collapsed. But the global economy was ill. For nearly all airlines everywhere, minus a few with the right immune systems to prosper—i.e., a few U.S. LCCs—the ensuing year was downright dreadful.
This time is different. As fuel prices plummet once again, the outlook across the industry is far more varied. Some airlines are indeed battling flu-like symptoms in their home economies, along with other drags on their revenue. Fuel hedges, too, are blocking the sunshine for many. But as the four U.S. airlines that reported Q4 earnings last week demonstrated, some stand to prosper like never before.
During the quarter, Delta, United and Southwest alone amassed losses from fuel hedging that reached into the hundreds of millions of dollars. Still, their fuel bills declined by double-digit percentages, driving profits that were extremely high by off-peak standards. A more modest softening of fuel prices in the first three quarters of the year led to savings too, which together with the Q4 bonanza resulted in an excellent full year for all three carriers. Alaska Airlines, which didn’t have any realized hedge losses because it insures itself with options contracts—these are more expensive up front but carry no downside risk later—did even better. And American, which reports this week, will show massive savings because it doesn’t hedge at all. Neither, for that matter, does Allegiant.
For U.S. airlines, market conditions couldn’t be any better. Far from coinciding with a collapsing economy as in 2008 and 2009, plummeting fuel prices are this time moving in tandem with a surging U.S. economy, reminiscent of the late 1990s, the last time fuel was cheap and GDP was booming. And the current situation is even better than that, because today’s U.S. airline industry is less fragmented, more disciplined and better cushioned by ancillary revenues, restrained capital spending and better labor relations (remember the Northwest pilot strike of 1998?) Airlines have far better tools and technologies to manage their businesses today as well—think how far revenue management science has evolved since the 1990s, or how much more dynamically carriers can distribute and merchandise their products and services.
Some U.S. politicians and media outlets, long on good intentions but short on economic understanding, have been demanding to know why airfares haven’t fallen in tandem…
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