Airlines Poised for $12 Billion Global Windfall on Oil Collapse


(Bloomberg) -- Airlines around the world are poised for a $12 billion windfall as the global oil crash cuts bills for jet fuel, the biggest expense in an industry that was battered by surging commodity prices last decade.

By Mary Schlangenstein, Michael Sasso and David Fickling | December 16, 2014 07:38PM ET

The savings promise to produce fatter profits and, in the U.S., rewards for shareholders through sweetened dividends or stock buybacks. Missing out so far are consumers, because many carriers are still filling seats without having to resort to discounts.

Unlike 2008 and 2009, when sagging travel demand damped the boost from fuel plunging 51 percent from its peak, crude’s collapse to a five-year low is providing a tailwind for airlines posting record earnings. Profits in 2015 will swell 25 percent to $25 billion, according to the International Air Transport Association, the trade group for the world’s major airlines.

“They’re dancing in the aisles of their planes,” said George Hobica, president of New York-based ticket-price website “All the production in the United States, shale oil and the fact that OPEC has not increased production -- maybe high oil was an aberration.”

Investors are welcoming a respite from Brent crude that averaged more than $100 a barrel in 2012 and 2013. Led by China Eastern Airlines Corp. and Air China Ltd., the Bloomberg World Airlines Index has soared 25 percent this quarter while Brent tumbled 37 percent.

Good Timing

“The price slump could hardly have come at a better time for Southeast Asian airlines,” said Peter Harbison, executive chairman of CAPA Centre for Aviation in Sydney. “They have got themselves to a stage where they can be profitable with $100 oil, so for the time being, they will be net beneficiaries.”

U.S. carriers strengthened by mergers since 2008 are also poised to take advantage of the new era. American Airlines Group Inc., which doesn’t hedge its fuel purchases, said it may save more than $2 billion next year. Even with losses because of fuel contracts pegged to higher prices, Delta Air Lines Inc. said it expects to pay about $1.7 billion less for jet kerosene in 2015 while Southwest Airlines Co. forecast savings of $1 billion.

“Falling oil prices are a fantastic thing,” Southwest Chief Executive Officer Gary Kelly said last week in an interview.

Industrywide fuel outlays in 2015 will drop to $192 billion from $204 billion this year even as consumption rises 4.8 percent, Geneva-based IATA said. Jet fuel for immediate delivery in New York Harbor, a benchmark for U.S. airlines, plummeted 38 percent to $1.95 a gallon this year. Brent crude has tumbled 46 percent, ending yesterday at $59.86 a barrel.

Lufthansa, Ryanair

For Germany’s Deutsche Lufthansa AG and Ryanair Holdings Plc based in the euro zone, the weak euro is likely to damp the benefit of lower fuel bills, said Oliver Sleath, a Barclays Plc analyst. U.K.-based EasyJet Plc and IAG SA’s British Airways may see “a bit more benefit” if the pound remains strong, he said.

The biggest European winners may include ailing carriers such as Portugal’s TAP, LOT Polish Airlines SA and Italy’s Alitalia SpA, which have struggled for profitability in the face of ballooning costs and competition from leaner low-cost rivals.

“We can see the argument that a lot of the ‘bankruptcy candidates’ end up clinging on,” said Sleath, who is based in London.

Sluggish economies in Europe and parts of Asia make it unlikely that airlines outside the U.S. will follow the same course as their more-profitable U.S. counterparts. U.S. carriers probably will plow savings into buybacks and retiring debt, said Joseph Denardi, a Stifel Financial Corp. analyst in Baltimore.

Inevitable Rebound

Memories of past fuel-price surges -- jet kerosene doubled in the 12 months leading to its July 2008 peak -- also run deep, according to Denardi.

“Across the industry, the feeling is that oil’s going to go back up sooner rather than later, and that $40 or $50 oil is not sustainable,” Denardi said in a telephone interview.

Prices at that level eventually may bode ill for the industry, as a harbinger of the slow economic growth that chokes travel. In the long run, that also may hurt Boeing Co. and Airbus Group NV, whose order books bulge with thousands of jets due for delivery through the end of this decade and beyond.

“My big concern isn’t so much the price of oil, or anything to do with competition -- it’s more the state of demand,” Virgin Australia Holdings Ltd. CEO John Borghetti said in a Dec. 10 interview. “If that is flat, and remains flat or deteriorates, then it’s not good, no matter what we do.”

Old Habits?

Investors and analysts are watching for any sign that airlines are trying to use lower fuel bills to revert to their old money-losing habits of piling on flights to grab more passengers. So far, that’s not happening.

“Concerns around capacity creep are minor in relation to the magnitude of fuel declines,”David Fintzen, a Barclays analyst in New York, said by e-mail. “When oil moves this fast, capacity can’t adjust fast enough to offset benefits, unless of course demand severely erodes to recession-type declines.”

With few empty seats available, airlines are able to hold the line on fares and pocket the difference from shrinking fuel bills even as declining prices for other oil-based products, such as gasoline, flow more swiftly to consumers.

While U.S. politicians such as Senator Chuck Schumer, a New York Democrat, question airlines’ pricing practices, carriers are clinging to the surcharges put in place last decade on international flights when kerosene costs surged.

Australia’s Qantas Airways Ltd. isn’t likely to consider chopping those charges until there is a more sustained drop in fuel, CEO Alan Joyce said on a Dec. 8 conference call. “People have never had lower airfares than they have today,” he said.

Airfarewatchdog’s Hobica said the only pressure now on fares is coming from geopolitical issues and showing up in cuts such as those at Russia’s OAO Aeroflot. Until passengers decide to say home, carriers will hold the line on prices, Hobica said in a telephone interview.

“The airlines don’t want to give the money back unless they’re forced to,” Hobica said. “They’re not going to unless people stop flying.”

For Related News and Information:

To contact the reporters on this story: Mary Schlangenstein in Dallas at[email protected]; Michael Sasso in Atlanta at [email protected]; David Fickling in Sydney at [email protected] To contact the editors responsible for this story: Ed Dufner at [email protected]; Benedikt Kammel at[email protected]; Anand Krishnamoorthy at [email protected] John Lear

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