Airlines face future oil shock during recovery period

It is difficult to believe that the global economic slowdown commenced one year ago.

Since July 2008, airlines across the world began to cut back on their seat capacity, and parking their aircraft. In it’s July 2009 report on trends in the supply of airline flights and seats, the Official Airline Guide OAG reported that airlines are offering 315 million seats which represents a 1% drop when compared to a year ago. Reality is hidden in the fact that this chart is relative and in actuality the availability and demand has stagnated in to an extended L shape leaving airlines, still in the doldrums.

The global economy is still down in North America and Europe which is turn causing a lack of demand in the export driven economies of China, Korea, Japan, Taiwan and the ASEAN tigers. In India thanks to the large domestic market, there are modest signs of economic recovery with industrial production, core sector production, freight loading all in positive territory.

A key contributor to the collapse of the global economy was the soaring fuel prices in the first half of 2008. Nations across the world and their citizens were wondering when, not if, crude oil would cross the $200 per barrel mark. The chain reaction of crashes – economies to demand to oil prices, made us focus on more immediate priorities and we have conveniently forgotten that the core issue of unbridled demand for oil has still not been addressed. As economies settle down fuel prices are beginning to harden.

David Beckerman, vice president OAG Market Intelligence, said,

“Airline capacity is often cited as a barometer of economic confidence. Carriers adjust their fleet and services in anticipation of market demand for air travel, which is vulnerable to corporate cost management and to disposable income of leisure travellers at times of financial uncertainty.”

A stabilising of economic activity is translating to a gradual but steady increase in oil prices, but at the same time job losses and corporate cost cutting continue. This lag is natural as companies and individuals adopt a ‘wait and see’ approach before commencing expenditure. In the mean while, rising oil prices will impact the bottom lines of airlines while top lines will fail to rise thanks to the lag of passengers returning to the skies.

Grilled sandwich anyone? For airlines the worst is still to come.

About Devesh Agarwal

A electronics and automotive product management, marketing and branding expert, he was awarded a silver medal at the Lockheed Martin innovation competition 2010. He is ranked 6th on Mashable's list of aviation pros on Twitter and in addition to Bangalore Aviation, he has contributed to leading publications like Aviation Week, Conde Nast Traveller India, The Economic Times, and The Mint (a Wall Street Journal content partner). He remains a frequent flier and shares the good, the bad, and the ugly about the Indian aviation industry without fear or favour.

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