Airlines have experienced a market full of turbulence. High expectations after a powerful post-covid recovery, in which users were ready to spend whatever was necessary after the savings generated by the pandemic (the famous revenge tourism), collided with a new reality. Now companies no longer had the almost unconditional demand and pricing power that had been granted to them. Companies therefore experienced difficult summer months, because they had to accept the fact that they were entering a new stage with poorer margins. However, an unexpected savior appeared and not only dampened the trend, but also caused a succession of frenzied gains in the sector: oil.
If in mid-June the European reference price (Brent) was at 87 dollars per barrel, it is now struggling not to lose the psychological level of 70 dollars. A complete paradigm shift which results from a sharp drop in demand from Asia initially, then from the gradual assumption that raw materials face a surplus with strong supply outside OPEC (especially from the United States). However, this sharp drop has found a new ally in the cartel itself, with Saudi Arabia opening the door to voluntarily reduce its cuts to avoid continuing to lose market share.
Airlines have therefore experienced a real revolution, since the prospects are now for higher margins thanks to a very significantly reduced key expenditure. The ETF which brings together the main airlines in Europe (iShares Europe 600 Travel) is up 20% since its low on August 5. IAGsince then, has seen an increase of 31.2%, while Lufthansa And AirFrance They qualify their bad year with increases of 22% and 17% respectively. Ryanair 17% do the same. In this same period Southwest Airlines. 26% advance, same increase American airlines . For your part United Airlines soars 55%. Even if the boom accelerated in North America after some convincing results in the South West this week.
To understand the reason for this change, it is necessary to explain that fuel expenses represent approximately 28% of all airline expenses, according to IATA data. This makes these companies very sensitive to changes in the price of crude oil. This is also clear from one of its latest reports on the oil market and airline consumption, published last June. This shows how in 2023, despite the fact that fewer gallons of fuel were consumed than in 2019 (92 billion compared to 96 billion then), last year’s spending was 271 billion dollars compared to a scant 190 billion people in the pre-pandemic era.
At that time, the price of a barrel was 64 dollars on average, compared to 82.5 dollars at which it was quoted in 2023. In this sense, the institution assumed that 2024 would be even more complicated. Although activity would improve even compared to pre-pandemic figures, with a consumption of 96,000 million gallons, Total airline spending would skyrocket to $291 billion. The reality is much more benign for these companies and the huge turnaround experienced by crude oil completely destroys these predictions.
IATA itself explained this week in its latest report that “The recent drastic drop in oil prices will be beneficial for growth“. The institution goes on to say that “as fuel represents around 30% of airline costs, lower oil prices will support profits and could help increase the estimated net profit margin, which currently stands at just 3 % for the industry in 2024. “
But it’s not just a question of cost. IATA defends that “the decline in crude oil favors economic growth” and, in addition, the relaxation of energy prices “will help central banks further ease monetary policy“The ECB is already cutting rates, with the practical certainty that it will reduce the price of silver again in December (and the possibility of a hike in October), while the US Federal Reserve has undertaken a “giant reduction” of 50% points in one fell swoop and you’re setting yourself up for an aggressive cycle of reductions.
This is why the market has completely changed its view on airlines, causing huge stock market rallies. JP Morgan itself explained this week how oil is completely changing the outlook for these companies. Concretely, when talking about IAG, the company explained that “we see a high probability of margin expansion“due to the drop in fuel costs. According to the company, the 20% drop over the last three months “will help to alleviate their margins in a context where they must face a drop in ticket prices” .
“There are many routes that have become more expensive to the point of generating losses”
For her part, Roma Andreu, professor at the EAE Business School, in statements to elEconomista.es He comments that this is the big factor that explains the movements, since there are no major changes in the relative activity of companies, until the approach of the Christmas campaign. “Lower crude oil prices are key understand this euphoria.
The expert explains that “there are many routes that have become more expensive to the point of generating losses“. Now the new approach of the market and OPEC speaks of a stable drop in prices, something that “is going to be a change that can last, causing an increase in profits, an expansion of routes and, ultimately account, an improvement in overall profitability.
Andreu points out that this new paradigm will mainly affect “flagship” airlines, as opposed to low-cost airlines. Indeed, even if the latter will also see their profitability strengthened, they are not as exposed to “black gold” as their counterparts. “First of all, domestic airlines operate much longer flights in which the plane commits for a long time for the benefits of a trip, they become much more sensitive to a change. » In addition, these “are forced to maintain longer and sometimes loss-making routes compared to the short flights of low-altitude flights”. costing airlines, some of these trips will return to profitability.”
However, the expert explains that the sector is getting there great opportunity relatively “unarmed” to take advantage of its full potential. The reason is that although many routes will become profitable and see a direct improvement in profits, there are currently not enough aircraft to expand their fleet due to a shortage of spare parts, which has slowed Airbus deliveries. Boeing’s safety concerns also limit orders. “There is a huge bottleneck due to problems getting new planes and expanding,” Andreu said.
In any case, the renewed spirit of the sector was particularly evident this Thursday in the United States with the results of Southwest (with Delta). The signature increased income prospects for the whole year in a very different context from that announced in June. At the beginning of the summer and until now, the company has been one of the epicenters of a real panic in the sector, talking about having to make “difficult decisions”. At the time, it reduced its outlook in the face of declining profitability that crude oil is now fixing on its own.
From now on, the entire sector is crossing its fingers that the current crude oil context is maintained, or even the cracks within OPEC, with Saudi Arabia in the lead, break with voluntary cutsopening the floodgates of oil and flooding the market. If this objective is actually achieved, the sector would suddenly find itself in a period of renewed momentum on its margins, making the bad feelings of the summer evaporate in record time.
