Airlines Start Tightening Belts as Fuel Prices Rise
Jet fuel prices have been steadily climbing for the last few months, but now the concern is growing even greater as instability sweeps the Arab world. Prices continue to rise and that means it's time for airlines to start cutting back on capacity plans. Delta is the first to throw its hat into the ring by announcing over 100 aircraft retirements.
As of Jan. 21, jet fuel was going for an average of $2.688 per gallon. That's only a half percent higher than a week ago, but it's more than 5 percent higher than a month ago and a full third higher than a year ago.
Now, with Tunisia having seen a revolution, Egypt in the middle of one, and rumblings of some sort in just about every Arab nation, there is rising concern about the future availability of jet fuel. What if a new leader comes to power and cuts off the supply? What if there is war that destroys refining capacity? There are plenty of bad scenarios floating around, and that makes prices rise.
Time to revisit fuel-price calculations
Airlines, having made their capacity decisions based on projected demand and cost levels, now have to revisit their calculations. Assuming all else stays the same, rising jet fuel prices mean that fares have to rise to cover the increased cost. But it's never as simple as just raising fares to that level. It's a matter of lowering the supply of seats to ensure that there is enough demand to fill them at a higher price level.
For Delta, this means that it's time to cut back on its projected growth. Its original plan was to add 5 to 7 percent more capacity in the first quarter and 1 to 3 percent across the full year. Now, those numbers are being lowered by 2 points.
Unfortunately, it's not as simple as waving a magic wand. Airplanes are very expensive, and you don't want to just park them if you still have to pay large payments. Fixed costs on those airplanes are so high that flying them less makes costs spiral even higher on a per flight basis.
To the desert with the fuel hogs
Delta is lucky enough to have bought Northwest, and that makes things much easier. Northwest, you see, was a very conservative company in that it held on to airplanes for ages, long after they'd been paid for. Since those airplanes have low fixed costs and also tend to burn the most fuel, they're prime targets for parking.
Within the next 18 months, Delta will park its entire remaining 35-strong fleet of 125-seat DC-9 airplanes along with the last twenty-six 34-seat Saab 340 turboprops that have been flying in the regional fleet. On top of that, 60 of the older 50 seat regional jets will go away.
Other airlines with newer fleets don't have quite the same level of flexibility as Delta does, but they will likely be looking to find a way to reduce capacity one way or another. This will mean fewer flights, particularly on shorter routes for Delta, and higher fares for everyone. If jet fuel prices keep climbing, this will only be the start.
Related:
- Lower Demand and Higher Oil Prices Lead to Fall Capacity Cuts
- How the 'Crack Spread' Is Killing Airlines
- Delta Has Substantial Fuel Hedges for 2009