Problems, Problems Everywhere: Airlines just won the fuel lottery. But hold the celebrations.
Winning the lottery can change a life forever. But as the winners of last week’s record Powerball jackpot in the U.S. should be warned: not always for the better.
You’ve heard the stories: A lottery winner becomes rich overnight but then falls into despair, unable to cope with the inevitable storm of changes that accompany the life-altering jackpot. Well, some airlines are starting to know the feeling.
Since July, 2014, the price of a barrel of crude oil has dropped from $104 to less than $30. For airlines, this is winning the lottery, pure and simple. And indeed, the massive windfall lifted profits for most carriers during the last couple of quarters, and probably will for the next couple of quarters too. This is as true in struggling emerging markets, moreover, as it is in the booming U.S. market, highlighted by the overwhelming number of airlines worldwide producing y/y margin improvements. IATA believes 2015 was the best year ever for the industry—Q4 earnings reports will likely confirm that beginning this week. And IATA expects 2016 to be even better.
Maybe. But this lottery prize comes linked to great discomfort for airlines, discomfort triggered by a host of highly unfavorable economic and geopolitical trends. True enough, it’s always tempting to romanticize the past. But not a few airlines are legitimately—in at least some regards—starting to long for the era of expensive oil, when in many respects, conditions for airlines were better.
With cheaper oil, of course, comes a strong U.S. dollar. That, in turn, is a corrosive force on much of the industry’s revenues, because consumers in many parts of the world have less spending power than before, even while airlines based in those countries are stuck paying for fuel and aircraft in strong U.S. dollars. And cheaper oil, along with dramatically cheaper commodity prices more generally, is devastating economies that are home to huge swaths of the world’s people: the Middle East, Latin America, Russia, Indonesia, sub-Saharan Africa and even parts of developed economies like Texas, Alberta, Norway, Scotland and western Australia.
These forces are slowing the long march toward globalization, which has been responsible for much of the…
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