Pages Menu
TwitterFacebook
Categories Menu
“You Shouldn’t Try To Catch A Falling Knife”

“You Shouldn’t Try To Catch A Falling Knife”

 

2014.12.15 — Lately, airports all over the country have been asking us one question with great regularity: do falling oil prices mean airlines will begin to grow capacity?

This December 12 article from Bloomberg illustrates the airline conundrum. Falling fuel prices are good for the cost side of the industry; but to the extent their fall presages an economic downturn (hurting airline revenues because of reduced demand), airlines’ benefit would be diminished. It’s even possible that a drop in demand could be so large as to more than offset cost savings, making airlines worse off than before. It may not be the most likely outcome, but it is possible.

What prevents airlines from expanding isn’t fuel prices per se, but rather airline psychology. Since the millennium, airlines have been burned by multiple shocks – some to demand, others to costs, all harmful to their bottom lines. They no longer believe that any status quo is sustainable. Whether the price of fuel is rising or dropping, the airline inference either way is – in the words of Gary Kelly – that the knife is falling. They don’t want to try to catch it. Instead, what they want to do is be prepared for the next shock, and that means continuing to be disciplined; not to have any excess capacity when it hits. Until that psychology changes, no amount of good news will lead to airlines’ – with the possible exception of the Ultra Low Cost Carriers, or ULCCs – net capacity expansion.

Post a Reply