Airline Weekly - January 18, 2016
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Airline Weekly - January 18, 2016

Problems, Problems Everywhere: Airlines just won the fuel lottery. But hold the celebrations.

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Problems, Problems Everywhere: Airlines just won the fuel lottery. But hold the celebrations.

Winning the lottery can change a life forever. But as the winners of last week’s record Powerball jackpot in the U.S. should be warned: not always for the better.

You’ve heard the stories: A lottery winner becomes rich overnight but then falls into despair, unable to cope with the inevitable storm of changes that accompany the life-altering jackpot. Well, some airlines are starting to know the feeling.

Since July, 2014, the price of a barrel of crude oil has dropped from $104 to less than $30. For airlines, this is winning the lottery, pure and simple. And indeed, the massive windfall lifted profits for most carriers during the last couple of quarters, and probably will for the next couple of quarters too. This is as true in struggling emerging markets, moreover, as it is in the booming U.S. market, highlighted by the overwhelming number of airlines worldwide producing y/y margin improvements. IATA believes 2015 was the best year ever for the industry—Q4 earnings reports will likely confirm that beginning this week. And IATA expects 2016 to be even better.

Maybe. But this lottery prize comes linked to great discomfort for airlines, discomfort triggered by a host of highly unfavorable economic and geopolitical trends. True enough, it’s always tempting to romanticize the past. But not a few airlines are legitimately—in at least some regards—starting to long for the era of expensive oil, when in many respects, conditions for airlines were better.

With cheaper oil, of course, comes a strong U.S. dollar. That, in turn, is a corrosive force on much of the industry’s revenues, because consumers in many parts of the world have less spending power than before, even while airlines based in those countries are stuck paying for fuel and aircraft in strong U.S. dollars. And cheaper oil, along with dramatically cheaper commodity prices more generally, is devastating economies that are home to huge swaths of the world’s people: the Middle East, Latin America, Russia, Indonesia, sub-Saharan Africa and even parts of developed economies like Texas, Alberta, Norway, Scotland and western Australia.

These forces are slowing the long march toward globalization, which has been responsible for much of the... (376 of 1,503 words)

Also Inside this Issue:

Time to get the party started. On Tuesday, Delta throws the first pitch in this quarter’s earnings season, followed by United, Southwest and Alaska on Thursday. What will they say?

For one, that profits remain at extraordinarily high levels, underpinned by a historic collapse in fuel prices. Less certain is what they’ll say about demand conditions, the U.S. economy and their struggle to keep pocketing their fuel savings, an exercise increasingly difficult as fares decline in response to rising capacity and mounting attacks by ultra-LCCs.

Speaking of ultra-LCCs, Allegiant and Frontier launched another round of missiles last week, in Frontier’s case aiming at many big-city markets. And even Allegiant, while not stepping on too many toes directly, will soon have a presence at Southwest’s Baltimore-Washington stronghold.

In Europe, Air France revealed $80m in lost earnings from the Paris terror attacks, which seemed to have affected many airlines that fly to France, including United and Singapore Airlines. But the impact has largely faded, and Air France, for its part, remains confident enough—based on low fuel prices—to shelve its most draconian visions of contraction. Instead, it promised unions some longhaul growth starting in 2017, but only if they provide productivity concessions.

Lufthansa still has its own labor woes to address. In the meantime, it seems to be stumbling operationally with Eurowings longhaul. IAG, meanwhile, has plans for a joint venture with LATAM, which in turn wants to form one with American too.

In another alliance development, All Nippon will buy a stake in Vietnam Airlines.

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