Airlines and Oil
With the uprisings now occuring in North Africa and the Middle East, oil prices are rising quickly and we’re seeing prices as I write this topping $100 / barrel. Airlines are already sounding warning cries of higher fuel prices and their (potential) impact to revenues as well as fares and stock markets are reacting to this as well with airline stocks losing a fair bit of value. Analysts are speculating whether or not airlines correctly anticipated this rise and, in my opinion, already unfairly criticizing anyone they can point to.
No one can plan for these events. In fact, I don’t believe anyone can accurately plan for oil prices anymore. The idea that oil prices can stay stable is fantasy at this point. We cannot accurately predict what will happen to both demand and supply in the world at this time. An economic recovery and rise in production in one region might drive up demand. A political crisis in an oil producing region may well constrict supply. And to further complicate the issues, speculators in oil are not known for being very stable people either.
Furthermore, no one is going to stabilize current oil prices as the factors that influence the prices are far too great for anyone one country or groups of countries to try to influence effectively.
The best that airlines can do is manage in the “now” and let tomorrow worry about tomorrow. Not for nothing, that is exactly the approach US Airways has been taking and with great success. They have no fuel hedging in place and they’re realizing more from that than other airlines are from hedging strategies.
Should airlines continue to hedge? Absolutely but only with the goal of stabilizing and making their budgets for fuel costs predictable. To pursue a strategy to completely offset the volatility of oil prices only spells disaster for them. What that means is, yes, they should hedge some of their fuel costs to help stabilize their planning but to a certain degree they are at the whim of the market places.
Despite the doom for oil prices spelled out as a result of the uprisings previously mentioned, I think we’ll find that while there may be overthrows of government, the chances of reduced oil supplies are pretty slim. If anything, the chances for rising supplies in the medium term are great which would actually mean lower fuel prices. In the short term, they’ll be highly volatile and that’s life.
Expect rising airfares over the next 6 to 9 months and a slow reduction going forward after that. Rising airfares will be a function of 2 major factors: higher fuel prices and renewed capacity restraint on the part of most airlines in light of fuel price volatility.
In the long term, the only major airlines I see being negatively impacted by these uprisings and it is potential only for now are the UAE based airlines such as Emirates, Etihad and Qatar. Each of these airlines is heavily dependent upon their home countries being peaceful with strong economic growth and the certainty that those regimes have provided thus far. Given the volatility in Bahrain and Yemen, I would say that if those uprisings spread further into other UAE members, those airlines fortunes may well be very negatively impacted.
In fact, I don’t believe anyone can accurately plan for oil prices anymore.
Codswallop. I can.
Oil prices are going to go nowhere but UP. Supply will decrease—it has to, as global reserves run down—and demand will increase. Any divergence from this is merely a temporary occurance, which will be rectified in the fullness of time.
Take that as Holy Writ.
-R
(clarvoyant)
I’m confused, Qatar, Bahrain and Yemen are not part of UAE.
My apologies. They are not. However, Qatar and Bahrain are next to the UAE and I was attempting to refer to the airline partners of which Emirates and Etihad are UAE based. A better phrase would have been to refer to the Arabian Peninsula or Persian Gulf states.