Oil Prices and Airline Profits

The massive rise in global oil prices had many airlines struggling with their given business model asking for more fuel efficient planes in the hope of reducing costs. The huge drop in oil prices by fifty percent in the last six months has again impacted the financing of these airlines albeit in a different way. In fact the dynamics of the market for airline passengers have not swung drastically with this fall in oil prices ensuring massive profits for Airlines. This is due to the fact that things just do not work this way for billion dollar corporations who would normally smother the effect of supply side volatility to protect their business models in the long term.

For an airline planes are considered as assets operable for 25-30 years. The plan is to maintain these assets at a cost over their lifetime. Dynamics of the fuel market is not a factor in overhauling an expensive fleet to make short term profits. The airlines would rather save this money for a rainy day when rocketing fuel prices may make it necessary for them to buy more fuel efficient planes.

Passengers are being returned some of the traditional benefits of flying their favourite airline for example through the offering of snacks and meal plans. However falling fuel costs in many cases have airlines showing slight declines in quarterly profits. Rising labour costs have had many airlines struggling to grapple with rising maintenance costs.

The Indian budget of 2016 has also shifted its attention to make Indian airports a prime destination for aircraft maintenance and overhaul or MRO through complete exemptions in customs duty for imported maintenance tools and parts. It has also promised to make serviceable many of the hundred and sixty odd state airports and pull them into the network. India enjoys a 20 percent airline passenger growth annually. But additional excise duties of 4 to 5 percent on ATF airline turbine fuel will have a cumulative effect on fuel and operational costs for the airlines.

What really impacts airline performance is not oil prices but the flexibility to use its capacity given its operational network footprint. Those airlines which choose to continue on marginalised routes monopolised by other carriers in the hope of having a presence for strategic reasons may have to rethink this sort of strategy as it is costly especially if they are just surviving.

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