Cheap oil prices allow the US airline industry to take flight

While many industries and consumers are reaping the benefits of lower oil costs, none are as excited as US airlines. For the first time in many years, US airlines were able to post massive Q1 profits. For example, Jet Blue posted an operating income of $253 million in the first quarter of 2015. This is compared to their operating income of $41 million in the first quarter of 2014. With oil costs down significantly since 2014 and airliner demand steady, airlines have enjoyed a larger profit margin, a very welcome sight in an industry that boasts around $6 profit a passenger.  While many consumers will hope to see cheaper flights, it seems that may be a pipe dream as the average round trip ticket including taxes right now is $454, only $2 dollars cheaper from last summer.  However, consumers may see some benefits. Lower prices may allow carriers to add additional flights on weak travel days and increase the number of flights overall.  So if prices do not drop, consumers may have added convenience in chplanesoosing when and how to fly.

These large profits for airlines are a welcome blessing as large airlines have struggled in recent years. Deregulation, increasing foreign competition, high oil prices, over extended fleets, and the 2001 terror attacks that wiped demand for airline tickets for about a year have all hindered domestic airliners. After a massive restructuring, which included dropping  150,000 jobs across the industry, management changes, and now lower oil prices have finally made airlines extremely profitable again.

Another important issue is whether lower oil prices will reduce new plane orders.  A few years ago, when oil was more expensive, adding newer, more fuel efficient planes seemed to be a savvy way for airliners to be able to compete in the market. As seen to the left, barring the 2008 recession, new plane orders have remained high and growing. Now with oil prices low it may become profitable to eke out a few more years with older less efficient planes before ordering new ones, especially given the lengthy time process in ordering and receiving new planes, sometimes upwards of 5 years. This will be a long term calculation that will affect the airline industry and will depend heavily on how long we will have these low oil prices.

-Derek Owen

Sources:

http://www.nytimes.com/2015/01/14/business/international/falling-oil-prices-a-boon-to-airlines-pose-a-challenge-for-airbus-and-boeing.html

http://www.bloomberg.com/bw/articles/2014-10-20/how-cheap-oil-could-become-a-real-problem-for-airlines

http://www.forbes.com/sites/danielreed/2015/04/27/dont-believe-everything-you-read-lower-fuel-prices-arent-why-us-airlines-are-earning-big-profits/

http://www.foxnews.com/travel/2015/04/27/record-airline-profits-dont-translate-into-great-deals-for-consumers/

http://worldairlinenews.com/

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6 thoughts on “Cheap oil prices allow the US airline industry to take flight

  1. tpercy31

    The big question here is what will happen to these large airline companies when the price of oil rises back to its original prices. We have already seen the price of oil start to rise again, in much part due to a reduction in U.S. oil production and recent tensions in the Middle East. Will the airlines be able to keep these new planes that they have ordered in commission, as well as their decreased prices and wider array of flight options, or will these benefits simply become temporary until the price of oil rises enough to warrant them to take them away.

    Reply
  2. pdburp17

    Good insight into a world that tends to drive us all a little crazy at times. Like the previous comment, it will be interesting to watch as oil prices eventually rise. Seeing as airline tickets cost practically the same amount now as they did even when oil was twice as expensive, it makes a consumer wonder if ticket prices will gradually increase along with oil prices. Furthermore, what will the airlines do once their profits are no longer as large? This question, along with others, certainly need answering.

    Reply
  3. piotrbroda17

    Another question worth asking is if ticket prices will drop if oil prices stay this low for an extended period of time. The airlines might keep prices high to make up for the weak revenue during the recession. In fact, ticket prices might actually rise because the dollar is strong compared to the euro so many Americans might want to travel across the Atlantic for their vacations. Unless airlines increase the number of available flights, the increase in demand will put upward pressure on ticket prices. It will definitely be interesting to keep an eye on the airline industry for the next few months.

    Reply
  4. ddowen17 Post author

    I am also very curious to see how a rise in oil prices will affect the airline industry. From current media though, it does not seem as if oil prices will be rising anytime soon. There is a lesser incentive for workers to dig for oil, and even build new oil rigs, which may have some effect on GDP. Piotr made a good point about the strong dollar, and many Americans will take advantage of this ideal time to travel to Europe and consume there. Based on basic supply and demand models, this potential increase in demand would raise prices of airline tickets, but there are many more variables to the pricing of airline tickets. The increase in demand may already be factored into the price, as well as the decrease in oil prices. Just like mostly everything else in economics, we can only make educated predictions based on variables, but we must rely on time to show future outcomes.

    Reply
  5. MattReeves17

    This post presents a very interesting side to the change in oil prices. I did not think that the change in oil prices could lead to that large of an increase in operating income for an airline such as Jet Blue. This makes me wonder how this increase in income has affected other businesses, such as airplane engine manufacturing, and the manufacturing of other products that use oil. While the decrease in the price of oil has harmed part of the economy, it seems to have provided a stimulus to other areas.

    Reply
  6. Victor Matheson

    Nice post and good comments. In the last GDP report, the sector suffering the biggest contraction was the mining sector which includes oil exploration and drilling.

    Reply

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