Lower Fuel Prices Are Good News, Bad News for Aviation

 - January 7, 2015, 4:57 PM

With the global price of crude oil slashed literally in half over the past several months, the aviation industry is beginning to feel some effects. As an example, private aviation provider Magellan Jets announced that starting mid-January, it would reduce fuel prices for new member contracts by 16 percent across the board, thus passing along fuel savings directly to its customers.

If the crude oil prices remain depressed or even sink lower over a period of time, the industry might be in line for some changes, according to New Jersey-based aviation analyst Brian Foley. “One might initially think that a drop in oil prices would benefit the entire civil aviation industry as a whole, but as one digs a little deeper there are actually two aspects to it,” he said, predicting both positives and negatives to the situation. If the recent trend continues, he believes the declining fuel costs will prove a benefit to the smaller end of the general aviation market, from small piston-powered airplanes up through midsize business jets, a segment that has traditionally been rooted to North America, which has resumed its position as the world’s best economic region. According to Foley, falling fuel costs could spark a sales resurgence in the segment since operators of those aircraft are more fuel-price dependent, flying more when fuel is more affordable. Such an increase in flight activity will provide a boost to related businesses such as FBOs and MROs, as well as charter and fractional providers.

Foley also notes that such long-term changes could alter the sales distribution pattern of business jets. While the long-range, large-cabin models more than held their own during the most recent downturn, lower oil and commodity prices could hurt the once-hot emerging markets for these aircraft, such as China. He believes the long-dormant small and midsize jet segments could rise on the tide of the growing U.S. economy, since their sales center of gravity is not aligned with commodities.

In the commercial aviation market, Foley anticipates sustained low costs for the lifeblood of the industry could engender even broader changes, leading to airlines second-guessing or even deferring large orders for new fuel-efficient jets. “In some cases the scale will tip in favor of keeping the relatively young fleets they’re already operating even if they’re burning more low-priced kerosene,” said Foley. If passenger ticket prices remain high despite the decline in operating costs, the increased profit margin could also spur new entrants in the market using low-flight-hour aircraft cast off in favor of more efficient models. Foley noted their increased fuel burn would be offset by lower acquisition costs.

Comments

Have you included the downside of oil industry GA in your analysis. Lots of aviation depts will be downsizing

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