These are hard times for the airline industry. Dropping oil prices are a double-edged sword, with some airlines losing millions because of hedges gone bad. Currency woes are wreaking havoc with international prices and bills, air cargo loads are dropping dramatically and passengers just aren’t flying.
Fuel hedges gone sour
It doesn’t seem that any airline is immune to fuel hedging problems. Half a year ago Southwest was still racking up profits because of well-placed fuel speculation. Other airlines decided that in order to survive they would have to stabilize their fuel prices with their own hedges. Unfortunately, the worm turned and oil prices dropped sticking those who purchased fuel in advance with millions of dollars in losses.
One would think that dropping fuel prices should be a benefit. But when half of an airline’s fuel is pre-purchased at higher prices, the accounting cost-to-market rules are destroying balance sheets.
Southwest, United, Delta, American, Continental, US Airways and even Air Tran are all dealing with the same problem of steep losses on fuel hedging contracts. Only one or two smaller airlines are immune to these losses.
The silver lining: lower fuel prices and new hedging contracts will stabilize jet fuel prices for the coming months.
Currency woes creating new losses
On the other side of the Atlantic, changing currency rates are working against many international airlines. British Airways is having to deal with a weaker pound. Over the past three months, UK Sterling has dropped by almost 25 percent.
In a business where profits are measured in single percentage points, seeing a company’s main currency shift by a quarter of its value is devastating.
The rise of the dollar against virtually all major currencies is a bonus to US carriers, though. Without these exchange rate gains, they’d be suffering even more on international routes.
Air cargo in the tank
Part of the worldwide economic slowdown is a falloff in air cargo. There is simply not the same volume of goods being shipped by air across the world. Imports from China and the rest of Asia are off. Air cargo traffic has dropped since last year by more than 20 percent. The drop in air cargo traffic is the greatest in seven years. The IATA director general recently said that the “free fall in global cargo is unprecedented and shocking. There is no clear description of the slowdown in world trade.”
Passenger demand is dropping
Passenger traffic has been dropping globally over the past six months. The Asian carriers are being hit the hardest by dropping passenger revenues compounded by dropping cargo revenues. Even Europe is seeing a real drop in passengers at its major airports.
Domestically, airlines are continuing with capacity reductions. Delta just announced that it is continuing with capacity reductions during the winter, but planning new international route launches next summer. Every other major domestic airline has announced domestic capacity reductions.
There may be an upside for passengers. Airlines are beginning to compete with each other in other ways than simply price. Almost every airline is looking at improving many of the little things like cabin cleanliness. It is already nicer to sit on an airplane without having to sit in filth left behind by other passengers and not cleaned up by the airlines in the name of “cost cutting.”
Who knows? Maybe some of the new onerous fees might start to disappear and pretzels and peanuts might make a comeback.
Charlie Leocha is the President of Travelers United. He has been working in Washington, DC, for the past 14 years with Congress, the Department of Transportation, and industry stakeholders on travel issues. He was the first consumer representative to the Advisory Committee for Aviation Consumer Protections appointed by the Secretary of Transportation from 2012 through 2018.
