Falling fuel prices are idling oil exploration rigs, encouraging consumers to buy bigger cars, and
helping the aviation industry:
Falling fuel prices are encouraging airlines to keep less efficient aircraft in service for longer but they are also likely to see extra growth in air travel as airlines pass on the benefit to passengers in the form of lower fares.
The value of in-service aircraft is rising as 80% to 90% of airlines renting aircraft have extended their use, said David Power, Chief Executive of Orix Aviation, an aircraft leasing company.
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ReplyDeleteI agree that there is a marginal correlation between falling fuel price and an increase growth in air travel. I mentioned marginal because, in too many cases, the consumers are the last to enjoy the benefits of these savings. Essentially, these savings are differed to the executives and investors of the airline companies instead of being offered the consumers.
ReplyDeleteCase in point, Delta Airlines Inc. said it would use a projected $2 billion in fuel savings this year to pay down debt and return cash to shareholders/investors. Also, U.S. carriers are using the windfall from cheaper oil mainly to retool balance sheets rather than reduce airfares (Nicas).
As a word of caution, company’s incentives compensation schemes that handsomely reward managers for increasing accounting profit rather than economic profit could give them a reason to commit the sunk-cost fallacy (Froeb.2014).
I was very surprised last week when I drove up the gas station in New York where the regular gas price was $3.21 per gallon. This is unbelievable!!!Thus, I could see how the falling fuel cost will entice consumer to buy the big gas guzzlers. In a broader sense, though, now that consumers are leaning towards hybrid and natural gas powered automobile, Oil manufacturers should have serious concerns regarding market demand for oil in the near future. Notwithstanding, lowering the fuel cost, will only attract consumers for a awhile before they move on to even cheaper energy alternatives. I wonder if Boeing and Airbus are exploring alternate fuelling options such as natural gas and electric powered engines in future design criteria. This initiative would of course, kindle a competitive pricing war.
Reference:
Froeb, MCcann, Ward, Shor. (2014) Managerial Economics. A problem Solving Approach.
Ohio:South-Western Cengage Learning.
Nicas, Jack.(2015) Delta Says Fuel-Savings Will Be Used to Pay Down Debt, Reward Investors. Retrieved 1/24/2015 from
http://www.wsj.com/articles/delta-results-helped-by-falling-fuel-prices-1421759622
By: Leo Palmer at ESC 1/24/2015
Airbus and Boeing are developing upgraded models of some of their current planes to meet airline demand for more efficient planes. The manufacturers have been charging a premium for the more fuel-efficient models. Airbus and Boeing list prices are around $10 million higher for the upgraded single-aisle planes compared with those now coming off production lines. “Investment in new-technology aircraft will not stop,” said Frank Pray, Chief Executive of aircraft lessor Intrepid Aviation. “The investment rational will change,” Mr. Pray said. “The capital-cost differential can no longer be justified.” Aircraft lessors are increasingly important to the world’s largest plane makers. Airbus last week said that about 50% of deliveries in 2014 were financed in some form by leasing companies.
ReplyDeleteRepresentatives for the plane makers have argued that airlines make aircraft investment decisions based on long-term business assumptions, not on short-term oil price fluctuations. Airbus’s sales chief John Leahy, said low fuel costs make airlines stronger and more capable of buying new planes.
I am not sure what all the hype is about, if an airline owns it’s most expensive asset, why wouldn’t they want to invest in some upgrades rather than lease or purchase new aircraft? I spent 28 years in the Air Force; extending an aircraft longevity is based upon many factors. Once the aircraft no longer meets airworthiness standards, they are removed from service. It’s not a very difficult decision to make when you already own the most valuable asset in your company that is making capital!
Wall, R. (2015). Lower Jet Fuel Prices Shake Up Aircraft Market. The Wall Street Journal, 1.
http://www.wsj.com/articles/lower-jet-fuel-prices-shake-up-aircraft-market-1421676374
Not only do the lower gas prices have an effect on air travel but also on the sale of electric powered vehicles. Brad Tuttle tells us that one "reason for underwhelming sales of the Focus Electric—and for many alternative-fuel cars in general, for that matter—is simply that gas prices have been getting cheaper and cheaper". (Tuttle, 2014) So, now what will be done with all of those electric powered vehicles that were produced and manufactured in an effort to cut commuting and travel expenses? Besides the fact they were cheap on gas (LOL!), these vehicles had other very important contributions such as they cut down on pollution. Back when they were first introduced to customers, they were the greatest things and where going to solve our problems. Now, they will end up getting replaced by larger gas powered vehicles that offer no benefit to pollution - all because the price of gas fell.
ReplyDeleteNow, who is to say that because these electric cars omitted the need for petroleum, they in effect are responsible for increasing the supply of the petroleum which resulted in lower gas prices and eventually drove the electric cars out of the market. What an interesting twist on the ultimate fate of the electric car!
References:
Tuttle, B. (2014). The Price of Hybrid and Electric Cars is Plummeting. Here’s Why. Retrieved from http://time.com/money/3529146/cheap-gas-prices-hybrid-electric-car/
ReplyDeleteMajor airlines have saved billions and recorded high profits for 2014. The future year 2015 is looking very lucrative. This in part is due to the lower cost in fuel charges, which is currently listed around 50.per barrel.
In Addition to the saving from fuel the industry generates billions of income from additional charges that are passed on to the consumer. These fees include, but are not limited to: surcharges, cost of booking with a human, curbside check-in, baggage fees, cancellation fees, boarding priority, seat option, snacks, drinks, pillows, blankets and movies.
The general public and some of congress feel that the industry should pass some of the profits/ savings on to the consumer, especially since the industry has had to be consistently bailed out by the government in recent years. However,” the industry claims, it will pay off debit, and that their pricing should be based on demand and not their cost structure”.Parker of American (Thomas, 2015)
“ Airline executives say most airliners are using “ capacity discipline” (businesstravelnews.com) . This allows the airline to limit the number of seats available, which helps keep prices high and planes full. The number of flights to rural areas have been reduced or stopped altogether in some cases. .” Harvard Business School Professor, Benjamin Edelman states: that when there is less competition, you can expect less” (Thomas, 2015).
Air travel as we once knew it, has changed – many kiosks stations have replaced humans; Airports are becoming self-service type of environment, especially for the experienced traveler. Also the difference between business and leisure traveler has become intertwined since many people remain connected to their office even when on holiday.
In my opinion, we should not expect to see any reduced airfares in the near future, unless new companies enter the market to stir things up a bit. We should expect to see additional expenses that the airline industry will generate and pass on to the consumer.
http://www.businesstravelnews.com/Business-Travel/U-S--Airlines-Maintaining-Capacity--Discipline-/?ida=Airlines&a=mgmt
Airline profits soar yet no relief for passengers Thomas Frank, USA TODAY 2:50 p.m. EST January 27, 2015
Froeb, McCann, Ward, Shor: (2014) Mangerial Econonics. A Problem Solving Approach, Ohio:South-Western Cengage Learning.
For the first time since 2009, most Americans are paying less than $2 a gallon. Just three months ago experts were shocked when it fell under $3. Consumers and the economies of the U.S. and most of the rest of the world are basking in the lowest prices for crude oil and gasoline in six years. U.S. crude oil traded Friday just below $46 a barrel and the average price for a gallon of gas was $2.04.
ReplyDeleteWhile there are some losers, such as oil companies, the oil-producing states and the oil-exporting countries that benefited from $100 a barrel for four straight years, most economists agree that the good outweighs the bad. The drop in gas prices is acting like an immediate tax cut for drivers, leaving them more money to spend on other things. The Energy Department predicts lower prices this year will save a typical household $750 compared with last year. This is a huge break for consumers that always need extra money to due repairs in their household.
Southwest Airlines told investors that it expects to save $1.7 billion on fuel costs this year. The downfall is that there will be layoffs in the oil companies. Oil drillers that fueled a roar in U.S. production will suffer, along with states such as Texas and North Dakota that rely heavily on drilling activity. Oil service companies have announced layoffs of thousands of workers just in the past week.
Cheaper gas prices are giving some consumers the confidence to buy a bigger and better car or even a home further from work. Nonetheless some analysts warn that, eventually, high gas prices will return.
Work Cited:
Fahey, J. (2015) $2 Gasoline: The Good Times Keep Rolling at the Pump. Retrieved from: http://www.dailyfinance.com/2015/01/23/gas-prices-two-dollar-gasoline/
It’s great that some of the airlines pass through the benefit of fuel savings to their consumers/customers in the price of airfare. However, it’s not uncommon for carriers to hedge fuel prices, protecting themselves from sharp spikes in prices and consequently not reaping the benefits of price falls (2014a). By locking themselves into a fixed rate the airline risked their opportunity cost, given they had limited information and were unaware of possibility of oil prices falling.
ReplyDeleteIt’s unsure how many carriers will lower their airfares, or pass their fuel/oil savings to the consumer. Reason being is that airlines invest millions if not billions of dollars in new aircrafts and company expansion into new locations. Since oil prices have fallen significantly for the last several months, this will have a profound impact on the airlines investment decision making and profitability, if this trend continues for the long-term.
(2014). What Do Falling Oil Prices Mean for the Airline Industry?. Retrieved from: http://www.oag.com/OAG-Blog/what-do-falling-oil-prices-mean-airline-industry
Today many air travelers are convinced that the price changes are intentional and deliberate. I am absolutely positive that there is nothing unintentional about these price switches and changes. The online reservation systems can track your computer and raise the price on you when you seem to be actually interested in the flight. However this can be trivially easy to prove if indeed airlines were actually doing it, like using cookies to jack up prices. Some of the ways we can find out are as follows:
ReplyDelete1. Install Firefox
2. Open travel website in your usual browser, like chrome etc.
3. Go through path of making booking until last step before payment
4. Note price you are presented with
5. Open Firefox
6. Repeat booking process until last step
7. Compare price in Firefox with price in your usual browser of choice.
8. If price is cheaper in Firefox then the website is most likely using cookies to change the prices.
Maybe one of the reasons why companies probably are not doing this, because it would be so easy to test and prove and there would be a massive public outcry against them. To all those people above who have said "I have seen first-hand evidence of this" etc either put up or shut up and show a real life example of this happening right now using the method I just outlined above and you can convince me, otherwise what you are seeing is caching of prices or possibly a bait and switch. In short I find the 'raising prices by tracking cookies' extremely unlikely.
Reference:
1. Froeb, MCcann and Ward, Shor. (2014) Managerial Economics - A problem Solving Approach.
Ohio:South-Western Cengage Learning.
2. What Do Falling Oil Prices Mean for the Airline Industry?. Retrieved from: http://www.oag.com/OAG-Blog/what-do-falling-oil-prices-mean-airline-industry
Great points
ReplyDeleteIt’s unfortunate that companies often make business decisions based on stakeholder’s short term profit expectations. The case in point is the airline industry’s continued use of inefficient airplanes due to the decrease price of fuel. Companies often ignore the impact their operations have on the environment. Our current financial reporting incentivizes business to ignore the economics in the cost of operations. CEO’s strive to maximize the current accounting profit, which may not benefit the future of the company or the environment.
ReplyDeleteOur current tax code provides incentives, or tax credits for investment in energy efficiency. Why don’t we also have an added tax on capital purchases that do not meet new energy criteria? The automakers have been slow to produce energy efficient cars. If the consumer had to pay an additional tax on less fuel-efficient purchases it would steer demand to the cars which meet fuel efficiency criteria. This financial tax would encourage consumers to purchase vehicles (or airplanes) that are better for the environment, and encourage automakers to make energy efficient cars. The long-term economic effects of our environment must be included in our current financial operations to change corporate behavior from a short-term profit taker to long term stewardship.
In 2010, oil prices started at $80/barrel. During the next five years, oil prices rose meteorically to highs of over $125/ barrel (infomine.com, 2015). In the airline industry, fuel is over 30% of the operating cost. Subsequently, the yearly spike in prices has created lower profits for the airlines and higher fares for travelers (Wall, 2014).
ReplyDeleteTo combat the fuel costs, airlines initiated several short-term and long-term steps. Short- term, the airlines eliminated flights to force passengers to fill planes to capacity. Airlines also raised fares several times, added a fuel surcharge, and began charging passengers for baggage as ways to increase revenue. Long-term, airlines began placing orders to replace older jets with more fuel-efficient planes. The analysis showed that the cost of purchasing new planes was better forecasting in the long-term for the airlines than paying the higher fuel prices for less-efficient airplanes.
Jetting to August 2014, world oil prices fell drastically and recently bottomed out at $46.18/ barrel (infomine.com, 2015). This shift in price and an oversupply of oil has caused airlines to re-examine their position and for some, to put new plane orders on hold. Also, airlines are putting older planes back into service, as the investment bank UBS noted “At current jet-fuel prices, 10- to 15-year old, single-aisle jets--like the earlier-generation Airbus Group NV A320 or the Boeing Co. 737, are 10% to 15% more cost effective than newer ones being delivered” (Wall, 2014). This bodes well for the airline industry, because they have the ability to make money with the lower oil prices. Both airplane makers and the airline industry also recognize that oil prices will rise again, but the levels may not reach above the $100/ barrel for some time. This means new planes will be needed to not only replace an aging fleet, but also to be more fuel-efficient.
On a more personal note as a traveler, I have not seen the impact of lower oil prices on airline tickets. In December 2014, Senator Charles Schumer (D-NY) sought congressional investigations as to why ticket prices “shoot up like a rocket but come down like a feather” (Sutherland and Harshbarger, 2014). An article by Michelle Baran puts the answer in plain economic terms – Supply and Demand. The airlines have created a market where there is little extra capacity and they are able to maintain their revenue without having to lower the prices. Some small low-cost carriers will drive prices down in some markets as they attempt to gain market share, and this will cause major airlines to respond with lower fares (Baran, 2015). This will be a very long process, and as a traveler, the benefit may never truly be seen since oil prices will raise again, and the two forces may cross before a lower ticket price is incurred.
Regards,
Karen Whelpley
Work Cited
http://www.infomine.com/investment/metal-prices/crude-oil/5-year/ March 4, 2015
Baran, M. (February 25, 2015). Dropping fuel prices not having impact on airfare, other prices. Web. (March 3, 2015). Retrieved from: http://www.travelweekly.com/Travel-News/Airline-News/Dropping-fuel-prices-not-having-impact-on-airfares-other-prices
Sutherland, A. and Harshbarger, A. (December 15, 2014). Airlines Charging Sky High Prices as Oil Costs Plummet. Web. (March 3, 2015). Retrieved from: http://nypost.com/2014/12/15/airlines-charging-sky-high-prices-as-oil-costs-plummet
Wall, R. (December 19, 2014). Old Planes Get New Lease on Life as Fuel Prices Fall Airbus, Boeing Reckon Orders for New Jets Are Safe. Web. (March 3, 2015). Retrieved from: http://www.wsj.com/articles/old-planes-get-new-lease-of-life-as-fuel-prices-fall-1419004310
Supply and Demand: Short-run Prices
ReplyDeleteFor a commodity like oil, any changes in prices barely influence the quantity demanded or supplied in the short run because of its less elastic quality. Oil quantities are relatively fixed in the short run since it can take years to explore, find new sources and bring them on-line. Therefore, supplies cannot increase quick enough to adjust for any rapid increases in demand. As a result, shifts in supply or demand can cause significant fluctuations in gasoline prices. A major reason for the recent low prices of gasoline can be attributed to new technologies being used in the U.S. that have been the primary drivers of increased supplies.
“When curves are elastic, shifts in demand and supply cause only small changes in price, but when curves are inelastic, those same shifts cause much larger price changes.”
“'Fracking'” technologies in the U.S. have enabled drillers to extract huge volumes of oil and natural gas from previously uneconomic sources […] Similarly, new technologies have allowed Canadians to extract oil from tar sand and shale formations.” (Stonebreaker, 2015)1
1Source: http://faculty.winthrop.edu/stonebrakerr/book/oilprices.htm
Lower fuel prices help air travel industry
ReplyDeleteWith fuel responsible for 26% of the industry's costs, the aviation industry is finding ways to cut down on fuel costs. It is under intense pressure to reduce carbon use, mostly because up to 40% of their costs is purchasing fuel. Newer designed passenger planes are being designed by changing to a more efficient way to maximize fuel efficiency using 'green diesel' or other fuels.
Boeing announced that they were looking to run their engines on a mix of 'green diesel' and jet fuel a year ago. Green diesel is made up of vegetable oils, waste cooking oil and the waste of animal fats, and when mixed together create a lower amount of harmful emissions than petro-diesel does. Several airlines have tested flying with a blend of jet fuel and biodiesel. Green diesel has been supplied by Finland, which affirms that they can produce 50 to 90 percent less carbon emissions than petro-diesel. Boeing has started a biofuel plant in China and grows tobacco that is rich in oil in South Africa.
It is expected that airplane efficiency will improve every year by 1.5% across the industry until 2020, and energy saving by 2025 will increase by 25%, or 3 liters [3.8 qts] of fuel per passenger per 160 miles [100 km] flown.
Fuel economy is also expected to improve by having all seats filled. Per a recent article at www.globalchange.com, an empty 747-400 weighs around 340,000 pounds. On take-off, a plane fully loaded weighs 800,000 lbs, but only 250,000 lbs is cargo passenger’s weight. Newer planes can be fitted with better engines, and reduce fuel usage in aviation by adding pointed wing tips to improve air flow, saving from 7% - 3.5% depending on the size of the plane.
Airline manufacturers are focusing on energy savings on new technologies per the article, including airline engine design; but despite energy price increases, the world's population will continue to sacrifice other spending to fly.
Dixon, P Future of Aviation Industry - Radical Change, http://www.globalchange.com/future-of-aviation-industry-radical-change.htm
Coxworth, Ben {December 3, 2014} Boeing aircraft makes world's first "green diesel"-powered flight, http://www.gizmag.com/boeing-worlds-first-green-diesel-flight/35057/
Charlton, J, {January 5, 2015} The future of fuel Aviation, http://www.aviation.com/commercial/future-fuel-aviation/
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ReplyDeleteThis comment has been removed by the author.
ReplyDeleteFuel prices are definitely going to play a huge role in helping various things; it can have great effect on currencies in Forex market. As a trader I am always keen to know how things are going in the market and be ready with any updates and thanks to site like these and my broker OctaFX, it’s a very easy task with having daily market news and updates from their team of highly qualified experts daily at absolutely zero cost.
ReplyDeleteYour blogs stuff is purely enough for me personally.travel market insights
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