WRITE A SUMMARY/ ANALYZE THE ARTICLE BELOW. Please take a position on the topic,
ID: 1215309 • Letter: W
Question
WRITE A SUMMARY/ ANALYZE THE ARTICLE BELOW.
Please take a position on the topic, for or against, agree or disagree
Why cheaper jet fuel won't mean lower airfares anytime soon
Cheaper fuel will help airlines pad profits; passengers unlikely to share through lower fares
Why cheaper jet fuel won't mean lower airfares anytime soon
Instead, the airlines will use their windfall to pay down debt and reward shareholders.
Airline CEOs worry that oil prices could just as easily go higher. They hope consumers benefiting from cheaper gasoline will splurge on airline tickets. But the biggest reason airfares aren't falling: Planes are plenty full at current prices.
Fuel is the biggest single expense at most airlines, and spot prices for jet fuel have tumbled by half since mid-September. If prices stay around these levels, U.S. airlines could save $20 billion this year by some estimates.
The road to fuel savings at an airline isn't always as simple as it is for a driver at a gas station.
Airlines often buy contracts known as hedges to protect themselves against sudden upward swings in fuel prices. However, when the price of oil crashes, those contracts can lose a great deal of value. Analysts say the accounting losses will be more than offset by lower fuel prices.
For example, Delta Air Lines Inc., the nation's third-biggest airline company, reported Tuesday that it spent $342 million less on fuel in the fourth quarter than it did a year earlier. But it reported a $712 million loss because it had to write down the value of future fuel-hedging contracts by $1.2 billion.
Airlines won't benefit equally from cheaper fuel because some, like Delta, will suffer losses on their hedging strategy. The biggest winner could be American Airlines Group Inc., which generally does not
Delta CEO Richard Anderson said Tuesday that his airline expects to save $2 billion this year on fuel, even with hedging losses. He said Delta will pay down debt and reward shareholders by buying back company shares, which raises the value of the remaining stock. As for passengers, he suggested that they can shop around.
"The marketplace is incredibly competitive, and there are always differences in fares," Anderson said.
The prospect of cheaper fuel led Moody's Investors Service to raise its outlook for airlines this week from "stable" to "positive." Moody's analysts say that if crude oil is $55 per barrel all year long — it was trading for $48 on Tuesday — fuel costs at seven of the biggest U.S. airlines will fall about $20 billion in 2015 compared with last year. Even with hedging give-backs, they will come out ahead by $15 billion, Moody's says.
Delta's results on Tuesday are expected to be followed with strong fourth-quarter reports later this week from United and Southwest, and next week by American Airlines.
Travelers who expect airfares to drop when fuel becomes cheaper assume that airlines calculate ticket prices based on their costs.
That used to be true, says Robert Mann, a former airline executive who now consults to the industry. A decade or more ago, a financially weak airline would cut fares to sell tickets and raise desperately needed cash by filling seats that would otherwise fly empty. Not anymore.
"The industry is full at these prices," Mann says. "You couldn't stimulate additional revenue by cutting prices."
Mergers have left four airline companies controlling more than 80 percent of the U.S. market. And they have been very slow to add new flights. That makes planes more crowded. U.S. airlines are filling more than 85 percent of their seats in some months — close to record levels, according to the government.
"Right now the airlines have a great balance of supply and demand, and they are using it to ratchet up fares," says Jim Corridore, an airlines analyst for S&P Capital IQ.
By last summer, U.S. airfares had increased 5 percent in a year and 31 percent in five years, according to government figures.
Besides, Corridore says, passengers didn't offer to pay more when fuel prices were high.
Some analysts worry that airlines will use cheaper fuel to justify adding lots of flights, which could drive down fares. So far that hasn't happened in the U.S., although for reasons other than cheap fuel there is overcapacity on some international routes.
There is an increasingly popular view within the industry that cheaper oil might even lead to higher airfares. The theory goes that consumers who are saving money on gasoline and heating bills now have extra cash to spend on travel. Moody's says that is one reason travel demand will grow at least 5 percent this year.
Explanation / Answer
Summary of the artcle:
Fuel cost is the biggest component of total cost in airlines. Since mid Sept. its price has dropped significantly. It has caused huge fuel cost savings. These airlines use to cover up price rise risk by taking position on hedge contract. It causes loss when the price fall.
Delta airlines in 4th quarter has saved $342 million on fuel cost and has suffered loss of $712 million from it. Still 7 biggest airlines are expecting extra 15 billion profit if fuel price throughout the year prevail at $55 per barrel.
Previously airlines industry was competitive. So fare prices were reduced frequently to improve occupancy rate. Now small airlines have merged. Only 4 airlines controls 80% of the market share. Also occupancy rate is very high. Addition of new capacity is hardly made. So they are reluctant to extend low fuel price benefit to customers by cutting fare rate. Instead fare price hike may be observed due to overcapacity. Airlines have planned to use extra profit in repaying long term debt and buy back of shares. It will improve value of remaining common stock in the market.
Realizing this prospect,Moody’s investors service is likely to improve airlines rating from stable to positive.
Conclusion: Considering the present sceario and opiions of experts in this field the statements of this article appears to be justified.
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