Several weeks ago I wrote a piece on the subtle risks of low oil prices for airlines. Those risks revolve around the potential for a breakdown in discipline amongst airline managers, and just as importantly, a rise in unrealistic expectations and demands from labor groups. Without question, the next few quarters, perhaps all of 2015 and some time beyond promise to be a time of profits the likes of which the airline industry has not previously known.
While I never believed oil would rise indefinitely, I never thought we’d see oil less than $60 a barrel again. However, this is where we are. I’m not qualified to explain things like crack spreads, refining costs, and how oil prices translate into what airlines pay for a gallon of fuel other than to say recent reductions in oil price will ultimately flow through to the bottom line. A one cent drop in fuel price paid per gallon translates into millions of cost reduction for an airline. Further, lower prices for auto fuels are like a tax decrease on consumers. With more money in their pockets, there is more to spend on other things, perhaps even an airline ticket.
I think Delta’s published practice of comparing their financial performance to other industrial companies and not just airlines is laudable. I have never believed that airline companies limping along from payroll to payroll in a market flooded with seats was a good thing. However, the next year to 18 months will tell a very important story about whether airlines really have moved to a new paradigm. Both management and labor will need to control their emotions and natural tendencies. Managements will need to keep capacity in check, resisting the urge to get back into market share battles financed by lower oil prices. Labor will need to recognize that the current oil price environment is temporary. Prices will rise again, and profits will be negatively impacted. The economy will slow down again. Expectations will need to be managed. In other words, everyone will need to keep greed in check. Watch this closely….could get interesting. Look no further than Dallas/Fort Worth.
-MJ, December 17, 2014