Airlines stand to benefit from the rapid decline in global oil prices in recent months, as many continue to operate with higher fuel prices in mind.

“I would argue that this is an anomaly and not a long-term trend,” says Rob Morris, head of consultancy at Ascend, at the Ascend Flightglobal Consultancy Finance Forum in San Francisco. “This is simply upside potential for airlines on the cost side today.”

The one-month futures price of West Texas Intermediate crude decreased more than a third to $67.38 per barrel on 3 December from a peak of about $102 per barrel on 25 June, New York Mercantile Exchange data shows.

The price of jet fuel has also decreased. A gallon of jet fuel was about $2.20 at the end of November, down from a peak of about $2.90 at the end of August, industry association Airlines for America (A4A) data shows.

Ascend anticipates an average price of $100 per barrel for oil in 2014, says Morris.

“I’m doing jumping jacks with where oil is right now,” says Nathaniel Pieper, vice-president of fleet strategy and transactions at Delta Air Lines, at the Ascend forum. Lower fuel prices make the carrier’s used aircraft fleet strategy “look great”, he adds.

Speaking with Flightglobal on the sidelines of the forum, he says that Atlanta-based Delta will continue to centre its fleet strategy around higher fuel costs with the expectation that oil prices will rise over the long term.

Wall Street airline analysts are generally bullish on falling oil prices.

“If jet fuel prices stay low and demand stays strong airlines should continue to outperform the broader equity markets,” writes Hunter Keay, an analyst at Wolfe Research, in a report on 1 December.

JP Morgan analyst Jamie Baker estimates that the drop in fuel prices represents an “annual industry benefit of slightly more than $10 billion”, in a report on 3 December.

Falling oil prices have raised questions around whether US airlines can maintain the discipline that has driven much of the industry’s recent profits. Keay cites the roughly 4% increase in scheduled domestic capacity from the second quarter of 2015 for his concerns.

“We’re still a little uneasy about domestic capacity creep that we expect to start seeing in spring 2015,” he says.

“Disciplined” capacity growth is generally considered to be roughly equal to or less than economic growth in the mature US market. The economy grew about 3.9% in the third quarter, the latest US Department of Commerce estimate shows.

US economic growth averaged about 2.1% for the first nine months of 2014, according to Commerce department numbers.

Jude Bricker, senior vice-president of planning and treasurer at Allegiant Air, says at the forum that he is also worried about how low fuel prices could impact long-term capacity plans at the airline’s competitors. They could also lower the barrier to entry for potential new carriers, he adds.

“We’d like to see fuel prices where they are or a little higher maybe,” says Bricker. “We can run the business in any fuel environment profitably.”

Source: Cirium Dashboard