The key issue from today’s Airline Economics event in Dublin has been the unexpected windfall for the industry because of lower fuel prices. The most immediate expectation is that airlines are getting to make windfall profits. This is obviously good for the airline industry .
But industry veteran Bill Franke, from Indigo Partners, and a long time investor in the low cost airline business warned against becoming too comfortable with low cost oil. In his estimation this low price will not last. His sentiments were echoed by a panel of industry experts consisting of lessors. Although set up as a debate, a cogent argument made by the panel was airlines should stay the course with their orders for new aircraft. The counter argument was that suddenly lower fuel prices have made older aircraft useful again. This view was emphasized by Aengus Kelly, CEO of AerCap who pointed out that they were leasing older 767s, A340s and 747s again.
The drop in fuel price impacts airlines with new, much more expensive aircraft on order. Since fuel costs are highly volatile, as the cost drops, then the economics of the business improves as quickly as the input costs fall. Mr Kelly pointed out that he feels his customers will keep their orders because nobody believes the current low oil price can sustain.
However the lessor panel pointed out that looking at the approximate $10m differential between an A320ceo and an A320neo cannot be justified at current fuel prices.
There is clearly a debate going on – and the lessors want to reassure the airlines their orders for MAXs and neos are solid decisions. Mr Franke concurs. At the same time, airlines have not cut fares. Some airlines, like Qantas, are being taken to task for still deploying fuel surcharges. Airline CFOs are seeing cash pour into bank accounts and most of it stays there. This is highly unusual for an airline CFO.
Airline managers want to hold on to their windfall as long as they can. Mr Kelly noted that even Delta Air Lines, a well-known airline for keeping older aircraft in service, recently completed one of the largest widebody orders in 2014 – all for more fuel efficient aircraft.
Since fleet decision impacts play out over 20 years, there is obviously going to be a fuel price increase again. The challenge is for how long airline managers can hold on to their latest windfall and push out capital costs. The OEMs and lessors do not want airlines to hold back on deliveries.