CHARLOTTE, N.C. -- What happens to the airline industry if oil prices keep falling?
"That would be a high-class problem to have," said Gerard Arpey, CEO of
, during a recent earnings conference call. "If oil prices retreated, that would be a good thing, but that wouldn't mean we or the industry should give back anything we gained in pricing or fees."
In general, it seems unlikely airlines would halt their current efforts to raise revenue, because the moves are adding hundreds of millions of dollars to their bottom lines. Even more improbable is the notion of carriers reversing their decisions to pare unprofitable routes and aging, inefficient aircraft from their fleets.
At this point, even fast-growth airlines, such as
, are on board. Shrinking capacity is right for AirTran and the industry overall, said CFO Arne Haak, in an interview.
"Oil has risen to be 50% of our costs," he says. "That means we have to have a smaller business so we can get higher revenue so oil isn't 50% of revenue." Still, were oil to dip back below $100 a barrel, "we would have to reassess," Haak said.
After expanding its capacity at a 20% pace for the past five years, AirTran plans a drastic slowdown. It will cut capacity 7% to 8% in the last four months of 2008 and by 4% to 8% next year as it moves to sell aircraft and to defer 22 deliveries from
. Full-year 2008 capacity growth will likely be 4% to 5%.
Haak says the deferred planes are gone for good, but "we do have tools we could use to resume growth," including selling fewer aircraft or leasing jets.
will be "fluid and flexible and look for opportunities" if oil prices were to fall significantly, said CEO Bill Ayer, on an earnings conference call. "But given where we are today, we think this is the prudent action to take."
Alaska will reduce its mainline capacity by 5% in the fourth quarter and by 5% to 10% in 2009.
For now, higher oil prices are squeezing costs out of the system, "forcing management to take the final step in deregulation," says FTN Midwest Securities analyst Mike Derchin. Marginal routes and aircraft are going away, while smaller hubs such as Cincinnati and Memphis, created in the "hubbing of America" after deregulation, could be downsized, he says.
Whatever happens with oil prices, Derchin says, Boeing and Airbus seem poised to benefit. If prices remain high, carriers will need to replace inefficient aircraft. Should prices dip, carriers will still likely look to revamp their fleets, and they'll have more money to do so.
"The accelerated retirements of the least-efficient aircraft fleets, 600 and counting, is expected to increase the number of new single-aisle aircraft required longer term despite downsizing of domestic operations by the network airlines," Derchin wrote in a recent report on Boeing.
Of course, with only two major commercial jet makers, fleet replacement will take years. "There is a very limited ability to accelerate deliveries in an environment where our order backlog goes up every year," says Airbus spokesman Clay McConnell. "We continue to sell more airplanes than we are delivering."