I get a lot of emails telling me how nutty I am for saying words like “paradigm shift” when it comes to the structural change that has happened with airlines and the way they are managed. As someone who worked in the industry for a few years, including 9/11 and its aftermath, I know airlines aren’t known for glowing financial performance. Airlines have been managing expensive fuel for the better part of a decade now. Bankruptcies, re-negotiations, and painful restructuring have brought us to a place where airlines can make a profit with jet fuel in the $3.00 per gallon and up range. It hasn’t been that long ago that the mention of $3.00/gal Jet-A to anyone involved in the airline business would’ve led to the next words from an airline person being the government will own all the airlines.
No one knows how long low oil prices will last. Any little thing in the Middle East could turn things around on a dime. But for just a minute, let’s assume they last a year or 3. We’ll also assume that we fly through the Ebola crisis, and financial markets don’t unwind too. Every penny drop in the price of jetfuel flows right through to the bottom line to the tune of tens of millions of dollars. In that scenario we are looking at a string of quarters where airline profits could be especially good….in airline terms.
Cheap fuel can be addictive to an airline…..and its unions. There’s no better example than Southwest Airlines. Does anyone else remember when Southwest was taking over the world because of its fuel hedges? They were growing rapidly while the other airlines were shrinking. Their labor costs grew too. And then the cheap hedges ran out….and so have most of their labor agreements. (Keep an eye on this one.) The risk in cheap fuel is taking the eye off the ball, on the part of management and airline employees. There are quite a few open labor agreements across the industry right now, with more coming soon. How the airlines and the unions manage this will be telling.
-MJ, October 16, 2014