Oil’s well… but, will it end well

It’s the question that everyone’s been asking since the summer of 2014 when oil first began its extraordinary fall in value. At the time, a barrel of Brent Crude was worth more than $110 and has since fallen to below $30 a barrel earlier this year, although at the time of going to press it was about $41 a barrel – still a drop of more than 63%.

With fuel costs largely accounting for a third of airlines’ entire running costs, the drop is a considerable boost for the bottom line for all concerned, with airlines reacting in a number of ways.

Qantas Airways has already started postponing the retirement of elderly aircraft as they become more cost-efficient, with CEO Alan Joyce recently admitting its two oldest Boeing 747s have had a stay of execution and remain in service.

Meanwhile Campbell Wilson, CEO of Singapore Airlines’ low-cost offshoot Scoot, has argued that fuel’s low cost will mean the opening of new routes that had previously considered economically unviable.

However, before the industry rewrites the rulebook according to the new normal, perhaps the most important question to ask is how long can we expect it to last? Aviation jet fuel consultant and owner of Astor Consulting Tony Astor argues the current good times won’t last long, with the drop set for correction soon.

He adds: “There is obviously no doubt whatsoever that the rapid drop in fuel prices is improving the bottom line of the aircraft and airlines; lots of airlines have reported better results and that’s down to a drop in fuel price.

“Of course, the risk for them is all the suppliers of oil sorting the problems out and production will go back down and we will go back to where we were six to 12 months ago.”

However, Astor also believes that any correction to prices could lead to an equally dramatic swing in the opposite direction as many oil companies have sought to cut their own costs in the current market, adding: “For the whole industry to supply new consumers it needs to find new oil fields and develop them for production. What we’re seeing at the moment is people have stopped looking for oil and developing oil fields.

“We’re building up a big issue. In a couple of years we’ll probably need to go from 85 million barrels of oil a day to 90 million and we won’t be able to.” He added this could mean oil suddenly peaking at prices of $200 a barrel before finally stabilising at $50 or $60 a barrel in up to six years’ time.

Sven Carlson Aviation consulting managing director Carl Denton agrees the recent low cost of fuel is more likely to be temporary than long-term. He argues that with hedged fuel prices being more than today’s fuel prices, the industry is expecting the rise to be soon.

Overall, Denton says the move has been positive for the industry despite a stronger dollar, and while airlines with hedged fuel are just beginning to feel the benefits now, he believes they will last into the summer. However, he warns airports that if they are expecting this to lead to a brave new world of route development, those that aren’t primary airports will be disappointed.

He cites the example of Norwegian’s announcement in March that it would introduce three new routes out of Manchester to Barcelona, Alicante and Malaga, routes that were already being served by at least four other airlines, as proof that times have changed.

Denton says: “These routes are incredibly well served which indicates how confident Norwegian is. It believes there’s a big enough market available for it to compete but this is creating massive problems from a capacity point of view. If you look at Gatwick I think it is genuinely full and there’s nothing it can do about it.

“It is a risk-averse strategy, it is a balance between being on a well-served route or being the only one on an unserved route and generating customers. They [the airlines] would rather have a price war with someone and they’re not worried about putting more capacity on a route that is already well served.”

Astor added while secondary airports might not see the benefits of reduced fuel prices immediately, they should not give up quite yet, particularly if prices do stay down long term. Denton also argues that they can do more to help themselves in the current climate by rethinking how they can best attract the airlines. “For secondary airports, I think the old days of commercial incentives are running down,” he says.

“Small airports need to be a lot more creative and look at partnerships with airlines and tourist boards. It is not just about what the airport can do, it is about what the tourist boards can do. If it is a leisure destination they have to be involved with the tourist board in the area but they have to understand what the airline wants.”

Denton adds other potential partner airports can consider including local travel agents and hoteliers as they seek to build a case for a new route on the strength of the entire destination, not just the airport itself. He believes new deals which would see airports share the risk as well as the profits with any airline introducing a new route will also prove commercially successful.

In short, while no one quite knows how long the new normal will last, it seems airports can best prepare for the future by focusing on the abnormal. A range of new commercial strategies will keep them ahead of their competitors, wherever they may be.

Routes News

Published since 2005, Routes News is the official publication of the World Route Development Forum and Routes’ Regional events, providing topical…