14 WINGS | March/April 2015 WWW.WINGSMAGAZINE.COMPHOTO: BRIAN LOSITO, AIR CANADAW
here is the price of oil
headed over the next
12-months? The crys-
tal ball remains cloudy.
At the annual Global
Airfinance Conference in Dublin, Ireland in
January, duelling experts predicted the cost
of oil could hover around the US$40 a bar-
rel mark for at least the next couple of years,
or creep up to US$100 a barrel by spring.
There is enough room between the extremes
to drive a fleet of tanker trucks through.
There is one certainty: the current glut
of oil will eventually be mopped up by
demand and the price of oil will recover.
How quickly or how high depends, un-
less the price dips further. All of which
illustrates that the oil-dependent avia-
tion sector is set for a volatile ride. It also
may challenge conventional wisdom that
operators will delay the capital cost of
adding fuel efficient equipment in favour
of holding onto their capital depreciated
gas guzzlers a bit longer – or so Airbus
and Boeing, with re-engined versions of
the A320 and 737, and Bombardier with
its clean sheet CSeries may hope.
Winners and losers are inevitable, al-
beit more difficult to sort out in Canada
where the benefit of plunging oil is offset
by a battered “petrodollar” headed in the
same direction. WestJet calculates that
every one cent drop in the value of the dol-
lar equals $15 million in increased operat-
ing costs. Nobody should be surprised if
the fuel surcharge is erased and replaced
by a currency surcharge.
The Montreal-based International Air
Transport Association (IATA) predicts
that average return air fares (excluding
taxes and surcharges) will fall by approxi-
mately 5.1 per cent over 2014, with cargo
rates dropping slightly further. That is
based on an average cost of US$99.99 a
barrel when airlines fill up the tanks. The
cost per barrel has fallen to less than half
that, but many airlines are straight jack-
eted by hedging decisions made when oil
was at its peak. Also known as forward
fuel purchasing, airlines will hedge a per-
centage of their future fuel requirement
to protect against volatility. Hedging is
expected to cost Delta Airlines US$1.
billion in 2015, but the carrier still pre-
dicts it will pocket an additional US$1.billion in revenue from lower fuel prices.
Air Canada will not detail its fuelonomics
before it releases its Q4 results as Wings
was going to press.
The practice is less in corporate aviation
because operators lack the financial clout
to lock in prices over the longer term. The
benefit of lower fuel prices should be felt
immediately within the general aviation
and corporate sectors, which will likely
result in more flying and new business for
FBOs and charter operators.
Bombardier expects lower oil prices to
dampen business jet sales in the lucrative
Middle East region. The energy sector is
the single largest customer for Bombar-
dier business jets. In early December,
Khader Mattar, Bombardier’s region vice-
president of sales for the Middle East,
Africa and Turkey told the National, an
Abu Dhabi newspaper, that if the price
of oil continued to drop it could result in
decreased sales in the region.
Conversely, lower oil prices could reig-
nite sales in the struggling light and mid-
size jet market according to Brian Foley,
a New Jersey-based general aviation ana-
lyst. He notes that the smaller segment
is “price elastic” and not aligned to com-
modities, which means more people are
likely to fly when fuel prices are low andthe economy is heating up.
Indeed, with more people
flying, airlines are adding
more flights as weak routes
become profitable. The po-
tential of a return to the bad
old days of fares priced to
snatch market share may be
enough for Airbus and Boeing to protect
fat order books for fuel efficient airplanes
from the plunge. It is important that, even
in an age of cheap gas, that the aviation
industry does not throttle back on increas-
ing fuel efficiency. IATA estimates fuel ef-
ficiency improved by 1.8 per cent in 2014
with further gains expected in 2015. The
association believes that efficiency im-
provements could be accelerated by reduc-
ing five per cent of wasted fuel burn as a re-
sult of airspace and airport inefficiencies.
One of the biggest winners in 2015
could be ultra-low cost carriers (ULCC),
including a potential startup in Canada
(see, “On the Fly,” page 8), according to
Foley. “Despite lower fuel costs, ticket
prices so far have remained relatively un-
changed. While this provides some short-
term financial gain to airlines it also paves
the way for new entrants. The door is open
for a new breed of startup to emerge that
uses cast-off, practically new aircraft the
majors are ditching in favour of new, fuel-
efficient models.” Lower fuel could be the
jump start hesitant investors in a Cana-
dian ULCC have been waiting for. | WFiner points of fuelonomics
The burning issue is about the winners and losers of lower fuel costs
David Carr is a Wings writer and
columnist.Bombardier expects lower oil
prices to dampen business jet
sales in the lucrative Middle
East segment
ALTERNATE
APPROACH
By David Carr |