Jet fuel price is a hot topic at the moment, so when someone pipes up about it, we sit up and listen. Speaking at a recent employee forum, president of American Airlines, Robert Isom, made perhaps the most realistic statement to come out of an AA management’s mouth all year. He said,
“We’re planning the airline in a world where oil will be at $75 a barrel forever”
Well, it is a fossil fuel Robert, and a finite resource, so all things being equal your prediction is probably right.
Back when AA merged with US Airways, the carrier was posting some pretty healthy profits. But then, weren’t most airlines, as the jet fuel price plummeted. When CEO, Doug Parker, said back in September 2017 that the airline would never lose money again, and predicted a share price of $60 by this November, he obviously didn’t expect to see the price of aviation fuel increase in quite the way we’ve seen it this year.
Back then American Airlines were buying back shares in the high $30s and were smugly smiling to themselves at the future profit they would realise when Parkers prediction came true. Little did they know that, almost one year on, these shares would be hovering around in the, erm, high $30s.
Parker still stands by his $60 prediction, so for now AA are sitting on those shares just waiting for the good news to roll in. but something seems to be standing in the way, and that something is the jet fuel price.
Do American Airlines jet fuel price strategies all look like Project Oasis?
If you’ve been paying attention, you’ll already heard of the somewhat grandly named ‘Project Oasis’. Using a Boeing 737 MAX, American Airlines are fitting more seats than ever before. Originally designed to accommodate 150 seats, American will be bumping this up to 172, reducing legroom and installing teeny tiny toilets to free up space.
This is an obvious strategy to mitigate any losses caused as the price of aviation fuel increases; after all, more seats = lower fuel per passenger. On the upside, the larger overhead bins mean everyone can bring a full-sized cabin bag, not just those who board first. But is this a price worth paying when we have to live with 30” of leg room?
For American Airlines jet fuel price increases offer an opportunity to upsell as well as downgrade. Their little faux pas with Basic Economy last year is undergoing a bit of a revamp, having already seen full sized carry on bags brought back. Although the premise is still to make flying so unpleasant that an upgrade feels like a good investment, the airline realises they took things too far and are looking to relax some of the restrictions in place.
It seems they still believe business travellers will upgrade, making it financially viable to press on with this strategy, while domestic customers will only slow things down at the gate by bringing bags when they’ve been told not to. Whether this will mean basic economy prices will rise remains to be seen.
The carrier has intimated that the current rising fuel prices will add a whopping $2.3bn to American Airlines’ costs this year. In an interview with Forbes, Doug Parker conceded that the main way to deal with the increased cost of running their routes would be on the revenue side, although we haven’t seen fares increase yet.
What effect is the aviation fuel increase having on the rest of the industry?
The knock-on effect of higher crude oil prices has made ripples across the industry. Between January 2017 and June 2018 fuel prices have increased by 138%, according to the US Energy Information Administration. Predictions are that, at least for the short-term future, things will continue in this trend.
Some of the knock on effects of the higher cost of fuel have already been seen, as WestJet posted their first loss in 13 years, thought to be a consequence partly of increased oil prices and also as a result of industrial action. Other airlines have also begun to respond to the situation, with Scoot redacting its promise to lose all fuel surcharges, and other low cost carriers thought to be following suit. Even the current golden child of the aviation world, Norwegian, could see their rapid expansion start to slow.
Despite bracing ourselves for more fuel surcharges, increased fares and condensed space on aircraft, it’s likely there will still be decent budget options out there. $75 a barrel or not, competition will continue to drive price wars in aviation, so even the shoestring traveller will still be able to uncover deals in the marketplace.