Rising fuel prices part 2: impact on airline profitability
The International Air Transport Association (IATA) estimates the jet fuel price average for this year will rise above the feared $80 per barrel mark. With this, the impact on 2018 fuel bill of the global airline industry is expected to be $39.3 billion. But do rising oil prices mean only bad news for airlines around the world? One investment bank says it “may actually be good” for airlines around the world, including the three biggest U.S. carriers - Delta, United, and American.
Impact on airlines
Just think about the statistics for a moment. According to one estimate, U.S. airlines consumed approximately 17.3 billion gallons of fuel (or 412 million barrels) for domestic and international flights in 2017. In that year, the cost for one gallon of fuel amounted to $1.69. If we break down U.S. airline fuel costs per available seat mile in domestic operations we can see that: Delta Air Lines fuel costs increased from 2.1 cents USD in Q2 2016 to 2.4 cents in Q2 2017; American’s fuel costs rose from 2 cents to 2.2 cents in the same time period; United’s – from 1.8 to 2 cents.
Last time oil prices spiked, airline stocks got crushed as the unplanned costs ate into their bottom lines. For instance, United saw its stock price cut by over a third. This was back in 2008 when prices soared past $140 per barrel, the Business Insider informs. But, according to Morgan Stanley investment bank, the rise in price may actually be good news for the airlines this time around. "There has been a level of debate amongst investors around the implications of higher oil on airline shares, and in our opinion, higher is a good thing," Rajeev Lalwani, analyst at the bank, was quoted as saying.
According to Morgan Stanley, rising oil prices could be good for airlines, because it would instill pricing and capacity discipline, financial constraints on costs and capex, and margin and multiple expansion. The bank estimates that for every $10 per barrel increase, airline margins can contract 1-2 percentage points. With rising fuel prices, airlines will have reason to raise fares again and "recapture the 5-10 points of lost pricing from recent years,” the Business Insider cites the bank.
In the case of Europe’s biggest discount carrier, Ryanair, although its average fare fell 3% in fiscal 2018, the airline says it expects "above-average EU capacity growth to continue into FY19, which will have a downward effect on fares.” The airline also predicts some upward pressure on airfare later in the year "as significantly higher oil prices impact margins, especially those EU airlines (that) continue to expand despite having no prospect of achieving profitability," it stated in the latest earnings release.
How big is the surge
According to IATA’s latest jet fuel price analysis, on May 11, 2018, global jet fuel price was up by 3.7% at $92.1/bbl from the same time one week earlier, which is 5.4% higher than the same time one month ago, and 54.2% higher than the same time one year ago. For a wider perspective of price developments: jet fuel cost was at its lowest for almost five years in January 2016, at just under $40/bbl. From that point onwards, the price rose relatively steadily to the current $92/bbl in May 2018.
To break down the data by regions, the fuel price as of May 11, 2018, ranged from $90/bbl in the Middle East and Africa to almost $95/bbl in Latin and Central America. Meanwhile, Europe along with the CIS (The Commonwealth of Independent States) as well as North America were both at the price of up to $93/bbl. The overall share in the world fuel price index for the period of May 4-11, 2018, shows North America and Europe-CIS leading the way with 39% and 28% respectively. They are followed by the Asia-Oceania region with a 22% share.
According to IATA’s data, the overall jet fuel price average for 2018, excluding handling costs, is predicted to be $83.4/bbl. This should impact this year’s fuel bill of the global airline industry with $39.3 billion.
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