In the midst of all the giddy sentiment that is starting to take hold in the industry concerning the “stabilization” in demand decline — a fact that April RASM estimates issued by some airlines have fueled this week — a new ugly problem is starting to make itself known. That ugly problem? Higher fuel prices.
As they say, if it’s not one thing, it’s another in this industry.
The big question concerning the recent relatively calm period of lower oil prices was this one — how fast would they start to ratchet up when the economy began to shows signs of recovery?
We, unfortunately, are starting to see that apparently the answer to that question is — pretty fast.
If you have not looked at the oil futures market lately, here is the bad news. As I post this (at about 1:30 PM CDT), the price of a barrel of crude is now sitting at 58.55, up almost $2 bucks for the day. Just two weeks ago, the price of crude closed at 50.80. Last Friday, it closed at 53.20.
Today’s price is the highest price that crude has posted since November.
What is fueling the push?
A combination of some encouraging signs on the economic front, U.S. equity markets that seem to believe the worst is over (whether it is or not) and a weaker U.S. dollar.
As most of you know, a declining US dollar makes dollar-priced oil cheaper for foreign buyers and tends to encourage demand, leading to higher prices.
Yes, it is indeed a vicious circle.
And one damn frustrating one if you are an airline. Do you hedge or not? At what price levels? With what hedging instruments?
Remember that many airlines were still paying the price (and dearly) in the first quarter for making the wrong move on oil futures last year.
What makes this rapid rise in the price of oil potentially more troubling for the industry than the record-breaking rise last summer is that it is rearing its ugly head at a time when the level of demand, i.e., revenue, has fallen through the floor.