Airlines May Weather Financial Crisis Well
By Brett Snyder
It would be easy to equate the financial crisis with a down time for the airline industry. An economic slowdown always means less demand for air travel, but this time, that might not plunge the industry into absolute chaos as has happened before. In fact, I would argue that the industry may be relatively well positioned to weather a downturn for the first time since deregulation.
How is this possible? It’s all thanks to high fuel prices. I know it sounds pretty odd, but the run-up in fuel prices while the economy was still strong forced airlines to really ratchet up their revenue performance. That’s why we see all these extra fees today, of course. And though that is distasteful to most passengers, it’s probably going to be the saving grace for airlines as we enter what may very well be an ugly recession.
Now, as demand drops, oil prices drop as well, and as long as those two continue to move in tandem, the airlines will probably be ok (barring extremes, of course). We saw oil near $150 a barrel before, but now we’re down hovering near $80. That significantly cuts airline costs, and it will offset some if not all of the reduced demand during down times. The fact that airlines have already cut back capacity dramatically also means that weakening demand can be handled better now than it could have a year ago.
Now, when does this turn ugly? If oil prices and travel demand start moving in opposite directions, then we have problems. The twin pain of less demand and higher fuel prices would certainly make for an ugly ending, but without an external shock of some sort, this scenario is unlikely.
Airlines begin releasing their third quarter earnings this week, and it will be very interesting to see how they did this summer. Revenue performance will give us a very good idea as to how the future may look.
By Brett Snyder
It would be easy to equate the financial crisis with a down time for the airline industry. An economic slowdown always means less demand for air travel, but this time, that might not plunge the industry into absolute chaos as has happened before. In fact, I would argue that the industry may be relatively well positioned to weather a downturn for the first time since deregulation.
How is this possible? It’s all thanks to high fuel prices. I know it sounds pretty odd, but the run-up in fuel prices while the economy was still strong forced airlines to really ratchet up their revenue performance. That’s why we see all these extra fees today, of course. And though that is distasteful to most passengers, it’s probably going to be the saving grace for airlines as we enter what may very well be an ugly recession.
Now, as demand drops, oil prices drop as well, and as long as those two continue to move in tandem, the airlines will probably be ok (barring extremes, of course). We saw oil near $150 a barrel before, but now we’re down hovering near $80. That significantly cuts airline costs, and it will offset some if not all of the reduced demand during down times. The fact that airlines have already cut back capacity dramatically also means that weakening demand can be handled better now than it could have a year ago.
Now, when does this turn ugly? If oil prices and travel demand start moving in opposite directions, then we have problems. The twin pain of less demand and higher fuel prices would certainly make for an ugly ending, but without an external shock of some sort, this scenario is unlikely.
Airlines begin releasing their third quarter earnings this week, and it will be very interesting to see how they did this summer. Revenue performance will give us a very good idea as to how the future may look.