Could Low Fuel Prices Hurt Demand for New Jets?

 - April 24, 2009, 8:46 AM
Fuel prices have fallen to the point where it could make sense for some airlines to delay equipment replacement.

Airbus COO for customers John Leahy often points to a coming wave of airplane retirements when questioned about airlines’ appetite for new equipment, even during a time of severely slumping traffic and mounting industry losses. Partly for that reason, Airbus sees little likelihood that it will have to cut output this year or even next, as customers in need of replacements hesitate to relinquish their 2010 positions for fear of not finding a place in line during an assumed 2011 recovery, the thinking goes.

Something has happened over the past year, however, that few had anticipated when oil prices peaked at $150 a barrel–a collapse in the price of jet fuel so pronounced that the cost justification for replacing old, fuel-thirsty airplanes with new models in some cases no longer appears so compelling. On the other hand, due to falling passenger demand, airlines continue to park airplanes at unprecedented rates. But how many of them they replace with new models could depend on not only the timing of a recovery, but the fuel price environment that prevails once traffic rebounds.

Experts in the field don’t expect oil to remain at $45 a barrel as the economy recovers. But the extent to which fuel prices rise or fall certainly stands as one of the unknown variables in the complex financial equation airlines must solve before deciding on whether to renew their fleets–or wring a few more years of use out of still serviceable equipment.