Carriers are tightening capacity and could increase fares and fees
Oil recently hit US$74 a barrel, up more than 140% over the last two years. As a result, U.S. airlines are dedicating nearly a quarter of their operating spend to fuel, which is squeezing profits. Airlines are reacting with tighter controls on capacity. They also may try to increase fares or restrict availability in lower-fare booking classes. In some markets, airlines may introduce or increase fuel surcharges. The rise in oil prices is linked to OPEC production cuts that began in 2016. Forecasters, including the U.S. Energy Information Administration, Economist Intelligence Unit and Oxford Economics, expect prices to remain elevated through 2020. They predict that even if global demand for oil slows, uncertainty about supply will keep prices high.
Oil prices keep rising
Click on image to enlarge
- Oil prices are up 8% since Jan. 1 and exceeded US$74 per barrel in July.
- The June announcement that the Organization of Petroleum Exporting Countries would increase supply has stabilized prices—but not pushed them down. The supply boost merely brings production to levels that OPEC agreed to at the end of 2016.
Jet fuel costs more
Click on image to enlarge
- Since the start of 2016, fuel costs for American Airlines, Delta Air Lines and United Airlines have risen 27%, based on a weighted average of each airline’s capacity.
- The price airlines pay for fuel rose 34% in the second quarter of this year alone.
Airline profits suffer
Click on image to enlarge
- U.S. airlines—most of which no longer hedge against fuel increases by contracting purchases in advance—are now allocating 24% of their operational spend to fuel; that’s up from 16% at the start of 2016.
- The increase is putting pressure on airline profit margins. American, Delta and United all saw second-quarter operating margins fall more than four percentage points year-over-year. So far, airlines are responding by scaling back plans to grow capacity.
