For one airline after another—in geographies as diverse as Brazil and Australia, India and Hawaii, Japan and Europe—a silent killer is on the loose. This time it’s not fuel, the global market for which is actually softening. It’s not a demand shock—not with worldwide traffic still growing at a healthy pace. Nor labor costs, which are falling in many markets as carriers restructure. Nor distribution costs, for which technology and innovation are driving down prices. Airplanes and airports are becoming more efficient too. So what is this mysterious force that’s causing so much grief for so many carriers?
Ask airlines what their biggest headache is at the moment, and many will point to the whims of the foreign exchange market.
The influence of currency values on the global airline industry isn’t new. But during the first decade of the 2000s, it was more often a force for good than for ill, outside the U.S., anyway. That’s because the U.S. dollar lost value against most major currencies, which meant most non-U.S. carriers got a break on their dollar-denominated costs—most importantly fuel, aircraft and borrowed money. The dollar fell in value as America’s budget deficits soared, interest rates fell, trade deficits ballooned (partly due to pricier oil imports) and the U.S. economy grew more slowly than the world average as emerging markets boomed.
Well times have changed. Now, though the U.S. dollar remains historically weak against some currencies like the euro, that’s the exception not the rule. Look around the world and the U.S. dollar is up in value, in some cases dramatically, against most currencies. Today, U.S. government finances are rapidly improving, America is importing less oil, commodity prices are down, the U.S. economy is growing as others are slowing and some countries are taking deliberate steps to weaken their own currencies in a bid to boost their exporters, never mind the negative impact this has on their big importers, including fuel and plane-importing airlines.
Japan is the poster child for that. It has boosted its money supply to help companies like Toyota and Sony sell more stuff overseas. But yen devaluation has been nothing but trouble for Japanese airlines, highlighted by the huge jump in their fuel outlays last quarter. When the world looks back on the years 2010 through 2012, they will be remembered as a golden age for Japanese carriers. And there’s no more palpable…
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